What Is Double Dipping?

Double dipping is an unethical practice. It describes a broker that places commissioned products into a fee-based account to earn money from both sources. In this context, double dipping is rare and can lead to fines or suspensions from regulators for the offending broker or their firm. The practice is usually done covertly, aided by a disengaged or otherwise unaware client.

Double dipping may take other forms, such as when employees covered by a state or municipal pension retire, which triggers the start of pension payments, and then are rehired in the same role from which they retired a few days later with little more than a slight title change.

Key Takeaways:

  • Double dipping is an unethical practice whereby a broker places commissioned products into a fee-based account to earn money from both sources.
  • Double dipping can lead to fines or suspensions from regulators for the offending broker or firm.
  • Double dipping also occurs when employees covered by a state or municipal pension retire, begin to receive pension payments, and then are rehired a few days later with a slight title change.

Understanding Double Dipping

Double dipping by a broker can take place in managed accounts or wrap accounts, in which a broker manages a client's account in exchange for a flat quarterly or annual fee, usually around 1% to 3% of assets under management. The fee covers the cost of managing a portfolio, such as administrative costs and commissions.

An example of double dipping would be when a broker or financial adviser buys a front-end-load mutual fund that earns them a commission and then places it in a fee-based account where it will increase the fees they are paid. The ethical way to handle such a situation would be to credit the client's account by the amount of the commission. Not doing so is double dipping.

Double dipping, such as in the example above, are actionable by regulators such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Either can bar a broker or advisor and fine them or their firm. In the case of a brokerage firm, they can be fined for a lack of supervision.

Double Dipping: How to Avoid It

There are a few red flags that investors should watch out for to avoid double dipping. For example, clients should be alarmed if a broker charges a management fee but suggests buying mutual funds from the firm that employs the broker.

Brokers tend to receive a commission for selling proprietary products, which could equate to double dipping. Clients should also pay close attention to statements regarding fees and commissions. When in doubt, or when a client feels a broker or advisor is not being entirely forthcoming, a lawyer should be enlisted to review any communications or disclosures.

Double Dipping and Pensions

Double dipping involving public employees and pensions is a legal but frowned upon practice that exploits legal loopholes. In effect, it involves retirement that is on paper only. It allows public employeessuch as police officers, state attorneys, firemen, school superintendents, and legislatorsto retire from their jobs and start collecting retirement after serving enough years to earn full retirement benefits. Double dipping then allows them to be rehired into their public service jobs.

The end result is that the double dipping individual collects a pension check and a paycheck simultaneously. Double dipping occurs in several states, notably New Jersey, New York, and California. One New Jersey law enforcement officer simultaneously collected $138,000 per year in pay for his duties as a county sheriff and $130,000 in pension payments from his previous employer, a municipality.