Double Dipping
Is your advisor charging twice for advice?

As the investment world evolves, I find that the changes happen so fast, that the regulatory environment cannot keep up. This leaves only the ethics of an advisor or an organization to handle the conflicts that arise on a daily basis. Here is one situation that I have witnessed from my twenty year position within the industry that is being conveniently overlooked by firms and regulators to the detriment of clients, much to the advantage of advisors.

It is called double dipping and it is the practice of earning fees twice on the same investment. Here’s how it goes:

Your advisor comes to you, “advising” that you sign up for a new type of investment management process, where an annual fee is charged for services, rather than a per transaction charge. You agree that it sounds sensible and tell them to go ahead and convert your current investments over to this style of payment. The double dipping test is, “will your account pay a transaction charge either to sell or redeem your current investments, in order to change to the annual fee arrangement?” If so, there may be something rotten going on. The other double dipping method I have seen is to first sell the client a DSC (deferred sales charge) mutual fund where your advisor earns fee number one, and then change these investments into a fee based account, thereby earning fee number two.

Either way you have just been double dipped. In the case of the mutual fund, given that there is usually a trailer fee earned (a percentage of the annual management fee) by the firm and the advisor, you may actually be enabling your trusted advisor to earn three fees on the same investment.

As far as this writer is concerned, since about 1987, when commissions were deregulated and firms changed the title (as well as the promise) on their business cards from, “stockbroker”, to “advisor”, they brought with them a duty of care to place the interests of those they were advising first and foremost. It is simply not in the best interest of the client to pay two or three fees to their “advisor”, and it is most definitely in the best interest of the advisor as well as the firm who shares in each dollar earned.

These practices are considered unethical as well as illegal in the United States. In Canada I have seen them occur since the practice is slightly ahead of the regulations, (or the regulations in Canada are a bit behind). Ethics would of course dictate it not be done, but as we have seen, some firms and advisors (as well as regulators) only look at the rules and not at the ethics of a practice if that makes them look better.

The sad fact is that while you may have paid a commission to purchase your current investment, or your advisor may have earned a commission, it does very little for your advisor after this. You may be holding it for it’s intended purpose, say long term growth. This “holding” earns nothing for your broker or advisor, as they may be earning a commission only upon making a transaction. This is partially the reason for the industry trend towards annual fee based accounts. Moving to annual fee’s can be an advantage to avoid the potential conflict of interest of commissions, but it may also be advantageous to the dealer who will have an, “annuity”, if you will, from these annual fee’s. They have positives and negatives, as does anything, but disclosure is a bit lacking on these managed accounts and regulation as we have seen in Canada is mostly self interested industry theatrics.

Double dipping is the invisible client killer that occurs in some cases, and I look forward to the day when firms and regulators recognize this and stop looking the other way because of the revenue it generates.

If your account fails the double dipping test, I would suggest you make up a firm but politely worded letter to your investment firm, with a copy to the provincial securities commission. They may take your enquiry seriously and you should be offered a full refund as well as an apology. Unfortunately, I have also seen legitimate complaints in this area brushed aside by both, as firms and regulators are loath to ever admit to ethical lapses. After all, integrity is the highest value that the firm lays claim to. It is yet to be seen if they will ever fully live up to it.
Written by an anonymous member of the investment community. It is with regret that this need be done anonymously, but until the investment industry begins to walk the talk of integrity and ethics, this kind of client friendly discussion is still considered grounds for dismissal at some IDA firms.