A:

In the financial industry, double-dipping occurs when a financial professional, such as a broker, places commissioned products into a fee-based account and then makes money from both the commission and the fee.

The financial industry has seen a tremendous increase in managed fee-based accounts like wrap accounts. In a wrap account, a financial firm professionally manages an investor's portfolio for a flat quarterly or annual fee that covers all management costs, administrative expenses and commissions. Managed accounts of this sort originally were created for wealthy clients. However, more investors now have access to wrap accounts because account minimums have dropped to around $25,000, in many cases. Typical fees on these accounts range from 1% to 3% of the client's assets.

An example of double-dipping would be:

An advisor purchases a front-end load mutual fund for a fee-based account that also will pay the advisor a hefty commission. An ethical advisor, because he or she already has earned a fee for account management, would immediately have the client's account credited for the amount of the commission. Failure to do so would be double-dipping.

Double-dipping, although rare, is strongly discouraged by the financial industry at large, which considers the practice to be highly unethical.

(For more on this topic, read How to Pay Your Forex Broker.)

This question was answered by Tony D'Altorio.

RELATED FAQS
  1. What is the difference between fee-based advisors and commission-based advisors?

    Understand the difference between fee-based advisers and commission-based advisers. Learn what types of duties each type ... Read Answer >>
  2. How do financial advisors charge fees?

    Learn how financial advisors make their money and how you can make sure they are looking out for your best interests by understanding ... Read Answer >>
Related Articles
  1. Investing

    Wrap Accounts: A Gift Of Advice?

    Fee-based accounts were banned in 2007, but a on a practical level, this service remains the same for investors.
  2. Personal Finance

    Fee-Based vs. Commission-Based Financial Advisors

    There are pros and cons to both fee-based and commission-based investment fee structures.
  3. Financial Advisor

    How Advisor Compensation Models Are Evolving

    Is there still a place in this world for commission-based advice in wealth management?
  4. Financial Advisor

    Top Reasons Why Advisors Should Go RIA

    The top reasons why advisors should go RIA only.
  5. Managing Wealth

    Pay Less for Financial Advice

    Here's a look at what you should pay for financial advice and investment management, what you should get for that price and how you can pay less.
  6. Financial Advisor

    Fee-Based Research: The Good, The Bad And The Ugly

    Providing information on stocks that would otherwise not be available, fee-based research plays an important but complicated role in the market.
  7. Insights

    Merrill Considers Alternatives to Fee-Only Model

    In the wake of the fiduciary rule, Merrill Lynch is dropping commission-based transactions from all of its retirement accounts, with possible exceptions.
  8. Financial Advisor

    Investment Fees: How to Understand Them

    There can be a variety of fees levied when investing. Here's a look at what they are and how to manage them.
  9. Insights

    Top 4 Things To Know About The Last Double-Dip Recession

    The financial media and investors are haunted with the prospect of a double-dip recession. We look to the past to see if a double-dip recession is in our future.
  10. Financial Advisor

    Investment Advisor Versus Broker: How They Compare

    What is the difference between an investment advisor and a broker?
RELATED TERMS
  1. Double Dipping

    For brokerage firms, when a broker puts commissioned products ...
  2. Wrap Account

    An account in which a brokerage manages an investor's portfolio ...
  3. Double-Dip Recession

    When gross domestic product (GDP) growth slides back to negative ...
  4. Commission

    A commission is a service charge assessed by a broker or investment ...
  5. Fee-Based Investment

    An investment account in which the advisor's compensation is ...
  6. Managed Forex Accounts

    A type of forex account in which a money manager trades the account ...
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  3. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  4. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  6. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
Trading Center