What is 'Double Dipping'

Double dipping is when a broker puts commissioned products into a fee-based account thereby unethically earning money from both sources. Double dipping, in this context, is rare and can lead to fines or suspensions from regulators for the offending broker or their firm. It usually happens 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 they retired from days later, usually with little more than a slight title change.

Breaking Down 'Double Dipping'

Double dipping by a broker can take place in managed accounts or wrap accounts, in which a broker managed a client's account in exchange for a flat quarterly or annual fee, usually around 1-3% of assets under management. That fee covers the cost of managing a portfolio, 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 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 would constitute 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, as well, for lack of supervision in the case of a brokerage firm.

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 sound the alarm if a broker charges a management fee but suggests buying mutual funds from the firm that broker is employed by. Brokers tend to get 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 it doubt, or when a client feels a broker or advisor is not being entirely forthcoming or clear, 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 employees, such as police officers, state attorneys, firemen, school superintendents and legislators, to retire from their jobs after serving enough years to earn full retirement benefits, start collecting retirement, and 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. Such double dipping happens in several U.S. states, notably New Jersey, New York and California. One New Jersey law enforcement officer was able to simultaneously collect $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.

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