Is your Financial Advisor Double Dipping?

Traditionally, financial advisors charge fees in one of two ways.  Either they are paid commissions on a per trade basis or they are paid a percentage (usually 1%) of the assets they are managing.  When a financial advisor charges BOTH a commission per trade and a management fee, this is called double-dipping and in many cases is per se unsuitable (because of the harm such high fees can have on the performance of the portfolio over time).

There is ample evidence that FINRA does not approve of such so called “Double-Dipping”. In a FINRA Notice to Members dated November 2003, the NASD (nka as FINRA) reminds members that fee-based compensation programs must be appropriate (i.e. if the fees are too high that can be inappropriate and therefore unsuitable).

As further proof of FINRA’s position on double-dipping, in a FINRA Acceptance, Waiver and Consent letter, Quest Capital Strategies, Inc. (a FINRA member brokerage firm) was fined for failure to establish adequate supervisory system and written supervisory procedures (“WPS”) relating to: (1) the supervision of certain mutual fund sales practices; (2) the supervision of accounts to ensure customers were not charged BOTH investment advisory management fees and broker-dealer transaction-based commissions; and (3) compliance with Regulation S-P regarding the encryption of customer information sent electronically. As a result, FINRA claimed that Quest Capital Strategies violated NASD Conduct Rules 3010(a) and (b) and 3012, and FINRA Rule 2010.

FINRA Frowns on Double-dipping

 FINRA also fined Sun Trust Investment Services Inc., $700,000.00 for supervisory violations to its fee-based business and to commissions on certain low priced stocks. In the notice of the fine, FINRA stated as follows:

“Firms that offered fee-based brokerage services had an obligation to do using supervisory system that were specifically designed for such business activities,” said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. “Sun Trust’s former program was yet another example of a firm that failed to put in place supervisory systems designed to ensure that its fee-based account was appropriate for the customers it placed in the program. In addition, Sun Trust also failed to monitor these accounts to ensure that they remained appropriate for the customers who opened them.”

FINRA found that during the period from November 2002 through December 2005, Sun Trust opened over 2,644 Portfolio Choice accounts without adequately assessing whether the accounts were appropriate for its customers. Sun Trust further failed to adequately monitor the activity in the Portfolio Choice accounts to ensure that they remained appropriate for its customers. FINRA identified at least 36 Portfolio Choice accounts that conducted no trades for at least eight consecutive quarters – and those 36 accounts were charged over $129,000 in fees during the last four inactive quarters.

In addition, certain Portfolio Choice account holders paid both a commission on transactions and an asset-based fee on those same assets. In more than 900 instances, Sun Trust erroneously failed to exclude a customer asset purchased with a commission from the asset base used to calculate the account fee. In these cases, the customers were double-charged, as they paid both a commission on the transaction as well as an ongoing fee on the asset. The double-dipping resulted in approximately $437,500 in excess fees and/or commissions paid by Sun Trust customers.

Free Consultation

Fees can have a meaningful impact on account performance and all investors should be mindful of what they are being charged.  If you believe that your financial advisor is over-charging you or even double dipping, please call the securities attorneys of The White Law Group at 888-637-5510 for a free consultation.  The White Law Group is a national securities fraud, securities arbitration and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida.

For more information on the firm, visit http://whitesecuritieslaw.com.