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.

Managed-Money Accounts

To understand how double dipping is done, you must understand managed-money accounts, or wrap accounts. The two terms refer to the same type of account.

In this type of 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 them 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.

What Double Dipping Looks Like

An example of double dipping would be: An advisor purchases a front-end-load mutual fund that pays a commission and puts it into a fee-based account that also will pay the advisor. 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 can also take the form of manipulating data so that fees and commissions are buried in transaction records. The Securities and Exchange Commission (SEC), for example, found that one discount broker had inaccurate data and had in fact been charging customers twice.

Penalties for Double Dipping

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

Brokers who get caught doing this can be heavily fined, and their company can be fined, too. The SEC may bar a broker, and the Financial Industry Regulation Authority (FINRA) may bar brokers as well. Both organizations can levy fines, resulting in what is effectively a double fine.

How to Tell If Your Broker Is Double Dipping

If your broker charges you a management fee, then suggests mutual funds that are issued by the same company the broker works for, red flags should go up. The company typically gives brokers a commission to sell its proprietary mutual funds. So the broker is getting paid twice—once by you, and once by the company.

Another thing to watch out for is excessive legalese in company communications and statements. The evidence of double dipping could be right there in front of you, but it is so confusing you can’t understand it. Have a lawyer read any statements about fees and commissions and explain it to you.

If you get a lot of assurances from your broker that some questionable figure on your account is nothing, something may be up. Get a lawyer or accountant to explain it. Do not rely on verbal assurances from the brokerage.

Three Mistakes Investors Often Make

  1. Not opening mail from the brokerage: Always open every piece of mail from your broker. In most cases, the brokerage is required by law to send you this mail. If you don’t open it, the onus is on you for not knowing what is going on with your money.
  2. Not reading the mail from your brokerage: Many people open their mail and glance at it, perhaps looking at the bottom line to see how they are doing in general. Don’t leave unread mail piling up, when it could contain information that is vital to you.
  3. Not getting financially educated: You need to understand what you have invested in. You also need to know how investments work, how to calculate your profits and how to understand expenses. A little study can go a long way. A broker is no substitute for your own due diligence.

The Bottom Line

Double dipping occurs in secret. It is either hidden by the broker or hidden because you didn’t look into it. Yes, regulators watch for this scam, but by the time they find it, you could be out a lot of money. Educate yourself, be on the lookout, and make sure you understand transactions on your account.

Trading Center