Dual registration among securities firms is the fastest growing sector in the industry. Yet, many dually-registered advisors — who are registered with both broker dealers and investment advisors — find it challenging to navigate the changing regulations and ethical rules that apply to their new roles.
What is the issue?
The issue for these advisors is that they must comply with two different ethical standards when advising clients. Advisors registered with the SEC are considered to be “fiduciaries” who are required to act in the best interests of their clients. Advisors who hold licenses through FINRA operate under a slightly lower ethical standard.
What are the requirements?
FINRA requires that advisors make investment recommendations that are “suitable” for their clients based on risk profiles, age and other factors. A recommendation that meets the “suitable” standard, however, may not meet the “fiduciary” standard. Given the investor paperwork and the fee structure of the advice provided, advisors should be aware of the attendant record-keeping, compliance, and disclosure requirements of the particular hat they are wearing.
Managing and complying with multiple sets of regulations as independent advisors and fiduciaries has proven difficult without engaging the services of a professional compliance consultant. As a result, government regulators and clients share a common concern — whether advisors are fulfilling their fiduciary duties to clients.
In 2014, the SEC’s National Examination Program, Office of Compliance, Inspections and Examinations noted the increase in the number of dually-registered advisors and flagged the convergence among broker dealer and investment adviser representative activity for monitoring. It noted the potential heightened risk to investors who have not been informed or don’t understand that their advisor may act in a dual capacity.
The risk to an investor is that the dually-registered advisor may steer the client toward an investment that is not appropriate for the risk profile. Such a recommendation for the benefit of the firm without a corresponding or greater benefit to the client could be a violation of a non-dually-registered advisor’s fiduciary duty.
What can advisors do to make compliance easier?
Dually-registered advisors and their associates must comply with both FINRA and SEC rules for the benefit of their clients. Here are a few things to consider when working in this dual role.
- Inform clients in which capacity the advisor is acting and providing services, as an investment advisor or as a broker.
- Provide separate contracts or agreements for each function to the client on an annual basis.
- Clearly state the advisor’s responsibilities in each role.
- Provide the client with the full fee schedule for each type of service.
- List out and explain potential conflicts of interest that advisors may have if acting in both roles.
- Understand the limits on which products to recommend based on the role through which the advisor is acting
- Think about whether the fees are fair and reasonable for the service being provided.
- Be aware that a flat fee may be higher than trade-based commissions for some clients. This issue is on both the SEC and FINRA’s radar.
- Calculate the potential fees to the client and disclose them up front. Help the client make an informed decision.
- Don’t skimp on compliance monitoring. Dually-registered advisors must comply with two sets of rules and regulations. Compliance with one set does not equal compliance with the other, regardless of the practical similarities.
- Engage a compliance consultant and an attorney when questions arise.
- Usually, a compliance consultant can file all mandatory SEC disclosure forms, draft compliance protocols and keep the advisor out of regulatory trouble.
While this article provides a general overview of the issues that advisors who assume a dual-registration role need to think about, it is best to consult with an attorney or compliance consultant before advising clients. Fixing mistakes, no matter how inadvertent, or responding to an investigation, will inevitably cost more.
