The Worst of Both Worlds? Dual-Registered Investment Advisers

Abstract

A 2007 surprise ruling by the Washington D.C. Court of Appeals required brokers to convert their fee-based brokerage accounts to Registered Investment Adviser (RIA) accounts. As fiduciaries, RIAs must place client interests first. These dual-registered investment advisers (DRs) have numerous conflicts of interest including affiliated mutual funds, insurance cross-selling, and mutual fund revenue sharing. Further, DRs appear to charge retail clients higher fees than independent RIAs, and regulators frequently discipline DRs. Finally, DRs invest RIA client assets in institutional classes of the same underperforming mutual funds they offer brokerage clients. Hence, many DRs may fall short of the fiduciary standard.

Keywords: conflicts of interest, registered investment advisers, brokers, dual registration, mutual funds