Are dual registrant firms the ‘worst of both worlds?’

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“The advisor does not have a clue in many cases” how their fund recommendations affect a broker-dealer’s bottom line, she tells FP Senior Editor Tobias Salinger.

Boyson’s disturbing insight stems from research she conducted for her working paper,“The Worst of Both Worlds? Dual-Registered Investment Advisers.”

After examining the impact of 12b-1 fees, revenue sharing and affiliated fund family relationships on the advisory services received by retail clients in the U.S., she argues that the conflicts of interest unique to dually registered firms can be harmful to clients. Indeed, her research’s findings raise fundamental questions about the services received by most clients.

“At the firm level, I would go so far as to say that I think these conflicts are very problematic,” Boyson says. “I think these conflicts lead to bad behavior and I think that these conflicts are something that we need to understand.”

Nicole Boyson is the Patrick F. and Helen C. Walsh research professor in finance at Northeastern University's D’Amore-McKim School of Business.
Nicole Boyson

For example, the fund families that share the most revenue with broker-dealers reel in the largest flows, according to Boyson’s research. Yet, at the same time, they yield lower returns than their peers. She also praises the SEC’s share-class disclosure initiative, which has drawn substantial industry pushback.

Still, Boyson acknowledges that the limitations of publicly available data make it impossible to quantify just how much revenue fund companies and BDs are sharing with one another. And one reason some advisors may not know about it is that they don’t receive it directly. The wide-ranging discussion explains the key questions at hand for advisors and the industry.