Robert Jamieson’s path to the top of the music industry started with counting vinyl discs on a churning production line in a Queens, New York, warehouse.
A management training program at CBS Records later led him to music powerhouses Polygram and BMG, where he helped nurture the careers of Bon Jovi, Christina Aguilera and Foo Fighters. By the time he was named chairman of recording giant BMG North American in 2001, he had amassed an eight-figure fortune.
Jamieson’s next priority was to find a way to invest his money safely. The man he turned to for guidance, Hector May — who’s now in the fourth year of a 13-year-prison sentence for defrauding his clients, including Jamieson, of tens of millions of dollars — was recommended by Jamieson’s father, who had met May through the Rockland County Country Club in Sparkill, New York.
Over much of a financial advisory career spanning 44 years, May wore two hats: president and chief compliance officer at a registered investment advisory firm in an affluent New York suburb called Executive Compensation Planners, and a broker registered with Securities America in La Vista, Nebraska. The dual firms and roles — advisor and broker — enabled May and his daughter, Vania May Bell, to steal money for years from Jamieson and his family, according to a 2019 lawsuit filed in a New York federal court by the Jamieson family.
The complaint alleges that the father-daughter duo put more than $15 million of Jamieson family money into roughly 20 brokerage accounts, ostensibly to buy municipal bonds. In reality, the Mays pocketed most of the dollars. The lawsuit also accuses the pair of using their brokerage affiliations to encourage the Jamiesons to invest $2.3 million in long-term annuities, generating high fees that the two fraudsters did not disclose.
Jamieson’s case is an extreme example of fraud. At the same time, it highlights an uncomfortable duality in the wealth management industry that can ensnare millions of Americans.
So-called hybrid advisory firms, which simultaneously offer both purely fiduciary and commission-based products, are one of the wealth management industry’s fastest-growing segments. Hybrid advisors appear in two types of companies: firms dual-registered as both an RIA with the Securities and Exchange Commission and as brokerage with the Financial Industry Regulatory Authority, and RIAs working with an outside brokerage.
Either way, the two-hats-under-one-roof model can muddy a key distinction.
On one side are independent advisors hewing to the fiduciary standard, the gold level of client care that requires them to always put a customer’s best interests first and avoid the conflicts of interest that come with promoting commission-based products.
On the other side are brokers, which earn commissions as an incentive to sell more expensive investments. Brokers are governed by Regulation Best Interest, which says that brokers and those who call themselves advisors must simply “disclose or eliminate” conflicts of interest, not avoid them, and consider “reasonable” investment alternatives that align with a client’s financial goals.
Murky client letter
The Jamiesons signed up to work with May and Securities America Advisors, or SAA, the registered investment advisor wing of brokerage Securities America, which is part of Phoenix-based independent broker-dealer network Advisor Group.
But the client agreement the Jamiesons signed in 2010 is confusing about what kind of client care they would receive. “Some of the actions attributable to SAA or Independent Advisor in providing investment advisory services in connection with this Agreement are undertaken through an investment advisor representative (IAR) of SAA or Independent Advisor, though any such IAR is not a signatory party to this Agreement,” said a copy of the agreement in court papers.
The agreement also seemed to establish a workaround to the firms’ and Mays’ duties when it stated that the Jamiesons would have legal recourse if any of the investment and brokerage entities or Hector May “breaches any fiduciary duty owed to Client.”
The convergence of two formerly distinct business models is cast as a win for investors, who in theory have more investment products and services to choose from.
But hybrid firms that perform either of these two different functions at any given time for a client are allowed to call themselves “advisors.” With nearly 1 in 2 Americans thinking an “advisor” always acts in their best interest, many investors can easily believe they’re receiving a fiduciary level of care when they’re actually dealing with a broker.
The confusion comes as the dual-registrant model grows rapidly. Last year, FINRA, the self-regulating watchdog of the brokerage industry, reported 307,590 dual registrants in the U.S. in 2021, out of 689,925 total advisors. In 2017, there were 268,799 hybrids out of 686,604 total advisors reported in FINRA’s 2018 snapshot. That’s a 14.4% increase in just four years.
The SEC has taken notice. Last January, It put hybrid firms on notice with a risk alert that warned many weren’t doing enough to let investors know which hat they wear at any given time. Wall Street’s regulator placed a particular emphasis on the legal requirement for advisors and their employers to disclose conflicts of interest that would be unlikely to arise at pure RIAs.
For a small fee
For at least 10 years, the SEC has been cracking down on advisors who fail to tell clients they’re being steered into fee-bearing mutual funds when no-cost, nearly-identical alternatives are available. Academic studies have found this problem more prevalent at hybrids and dual registrants.
One recent case centered on allegations that two connected advisory firms, Huntleigh Advisors and Datatex Investment Services, received various fees through an affiliated broker-dealer, HSC. The SEC accused the two St. Louis advisory firms of not disclosing that they were directing clients into high-cost mutual funds. Such funds charge fees that are automatically deducted from investors’ balances and later refunded to the broker-dealer. Huntleigh and Datatex settled the charges for nearly $900,000.
A fundamental flaw of dual registrants and hybrids is that they’re built on a mismatch of business purposes. Because brokers are compensated with commissions or transaction-based fees, they have an incentive to trade frequently and recommend investments that cost more.
By contrast, advisors who are pure fiduciaries are paid fees set at a flat rate or calculated as a percentage of the total assets they have under management. If fiduciaries can’t collect fees, they have little reason to push investors into funds that cost more.
Take the American Growth Fund Series One Class A mutual fund, an actively managed U.S. large-cap growth fund, that has a net expense ratio of 4.36%. The Vanguard Growth Index exchange-traded fund, which tracks an index, has similar holdings — but charges only 0.04%.
Dual registrants and hybrids have seen extraordinary growth. From 2003 to 2016, their total assets under management nearly tripled to $6.3 million from $2.5 trillion, constituting about 81% of the wealth management industry’s total in the latter year, according to Northeastern University finance professor Nicole Boyson. Pure RIAs, meanwhile, saw their figures spike sixfold to $1.4 trillion from $200 billion in the same period.
But the growth has come at a price for retail investors. In a 2019 year paper tiled “The worst of both worlds? Dual-registered investment advisers,” Boyson found that high net worth clients with more than $1 million in investable assets pay a fee equal to 1.42% of their assets when they work with hybrids. Investors who use pure RIAs pay only 1.03%.
For clients with less money to invest, the difference was even greater. Dual registrants working with clients with $1 million or less charged fees equal to 2.2% of assets. Purely independent RIAs charged only 1.2%. The differences add up over time, with the SEC warning that a 1% annual fee on a $100,000 portfolio that earns 4% results in $30,000 less in savings over 20 years.
“While fiduciaries are required to act in the best interest of clients, I find that dual registered investment advisers have potential conflicts of interest, including revenue sharing with third- party mutual fund families and affiliated mutual funds,” Boyson wrote in the study.
Like the case involving Huntleigh and Datatex, the vast majority of the SEC’s regulatory actions over fee disclosures concern so-called 12b-1 fees. Named for the section of SEC code they’re authorized under, the fees allow brokers to receive payments for steering investors into certain mutual funds.
There’s nothing about hybrids that prevents them from recommending funds with 12b-1 fees. But when they’re specifically wearing their advisor “hat,” dual registrants are under a fiduciary obligation to show that their investment recommendations are in clients’ best interests.
With 12b-1 fees, some brokers argue that mutual funds with higher costs hold the promise of greater returns over time. But hybrid firms have to make sure clients know what they’re getting into. The SEC’s risk alert from Jan. 30 warned that some hybrids are failing to “identify the disclosures that should be made with respect to conflicts that are specific to financial professionals that interact with retail customers in multiple capacities.”
In 2018, the SEC adopted an amnesty program for advisors who failed to inform clients of investment costs. The Share Class Selection Disclosure Initiative promised “favorable terms” to firms that self-reported failures to disclose fees. The offer, which ended in 2020, resulted in nearly 100 settlements and provided a combined $139 million in restitution, even if individual clients only received small amounts.
The Huntleigh and Datatex cases are the tip of the iceberg when it comes to advisors who wear two hats. In 2019, 79 advisory firms paid $125 million to settle SEC allegations that they hadn’t disclosed to clients the fees they’d be paying. Many of the firms on the list, including Robert W. Baird, Raymond James Financial Services Advisors and Deutsche Bank Securities, were hybrids — and among the biggest names in wealth management.
To be sure, allegations involving 12b-1 fees are not unique to hybrids. One year ago, a jury in federal district court in Allentown, Pennsylvania, found that Ambassador Advisors — a pure RIA based in Lancaster, Pennsylvania — and three of its executives had breached their fiduciary duties by not informing clients they had invested their money in high-fee funds. That same month, New York-based City National Rochdale, another pure RIA, agreed to pay $30 million to settle similar charges.
The legacy of Reg BI
Ron Rhoades, the program coordinator for personal financial planning at Western Kentucky University in Bowling Green, Kentucky, said that by using the words “best interest,” Reg BI makes a promise that the brokerage industry, whose employees have an interest in selling certain products, cannot deliver.
The words “best interest” blur the lines between what a fiduciary is and what a salesperson is, Rhoades said.
“Now, there is nothing wrong with being a salesperson, as long as you level with the customer,” he said.
In adopting Reg BI in 2020, former SEC Chairman Jay Clayton said he wanted to preserve investors’ financial services options. In a 2019 speech, he said he wanted to protect their ability to seek out a broker and pay a commission or fee for individual trades in stocks, bonds and other securities.
It would make little sense, Clayton argued, for clients to to pay for long-term advisory relationships when all they wanted was a solitary transaction. Investors, Clayton said, should be in a position to decide exactly what services they need.
“Do you want someone managing your account on an ongoing basis, or do you want recommendations on a few stocks, bonds, mutual funds and ETFs?” Clayton said in the speech. “How do you want to pay for those services?”
Fiduciary-only advisors: Conflicts?
Mark Quinn, the director of regulatory affairs at the brokerage-support firm Cetera Financial Group, argued that although fiduciary advisors may have little reason to engage in excessive trading to drum up commissions, their business model is not unassailable. For one, since most advisors earn fees as a percentage of the assets they have under management, they have an incentive to work solely with the wealthy.
“It’s also a matter of fact that there’s a big segment of the population that either does not need or is unwilling to pay the ongoing fees associated with advisory services,” Quinn said.
Quinn said it’s a myth that fiduciaries have few conflicts of interest. As so-called reverse churning cases have shown, advisors are just as capable of collecting fees for sitting back and doing nothing as brokers are of running up their commissions for trading excessively.
In a settlement last September with the SEC, the hybrid firm Waddell & Reed agreed to pay $775,589 for letting clients’ assets lie fallow in an advisory account, where fees were generated even in the absence of any trading or management. In that instance, the SEC argued, the clients would have been better off if their assets had instead been moved into a lower-cost brokerage account.
“It’s true commissions represent a type of conflict that doesn’t exist in the advisory world,” Quinn said. “On the flip side on the advisory side, they have an incentive to hold onto assets on an ongoing basis, whether they need to or not. So that creates a conflict as well.”
Quinn said if there’s any truth to the notion that Reg BI is a weaker standard, it’s because it requires broker-dealers to look out for investors’ interests only at the time of a sale or other transaction. The fiduciary standard, by contrast, binds advisors to clients over a long period of time and a wide variety of financial recommendations.
“In my opinion, there is not a lot of daylight between the two standards,” Quinn said. “The only real difference is temporal. Reg BI applies at the point of the transaction whereas fiduciaries duties go on.”
Who’s an “advisor”?
As part of Reg BI, the SEC banned pure brokers from holding themselves out to the public as “advisors” or “advisers,”a spelling that stems from the original 1940 law regulating the industry. But the restriction doesn’t apply to hybrid firms with brokerage arms.
“In other words, under Regulation Best Interest, dual registrants are permitted to use a title that conveys a fiduciary standard of care with respect to the entire advisor-client relationship,” Michael Kitces, a founder of the XY Planning Network of financial advisors, wrote in a 2021 petition to the SEC.
Kitces wants the SEC to ban the use of “financial planner,” “wealth manager” and other titles that give the impression advisors are acting as fiduciaries. His petition relies partly on a study by the nonprofit Rand Corporation, which found the wealth management industry “more heterogeneous and intertwined,” with thousands of firms taking many different forms and bundling diverse services” and the average investor “confused about financial professionals’ titles, duties, and fees.”
The Financial Planning Association, an advocacy and lobbying group, is making similar points in its current push for prohibition on the use of the title financial planner for advisors who haven’t met certain training and competency requirements.
In a separate petition filed in 2021, XY Planning called on the SEC to revisit a now-defunct rule that had allowed brokers to avoid fiduciary obligations when providing investment advice. That so-called Merrill Lynch Rule, in force from 2005-2007, said that broker-dealers weren’t fiduciaries as long as the investment advice they were offering was “solely incidental” — meaning completely subordinate — to their main business of buying and selling securities and funds.
Kitces argues that the demise of the rule spawned the rise of hybrid and dually registered firms.
“In practice, the outcome of this rule was the birth of the hybrid movement, making it commonplace for brokers to also be affiliated with their broker-dealer’s corporate RIA, such that they could offer brokerage accounts and advisory accounts side-by-side to the same client,” he noted in a blog posting on XY Planning Network’s website.
In 2015, roughly 14 years after Hector May and his daughter began their swindle, Robert Jamieson suffered a severe stroke. May had visited him in the hospital to assure Judith that she could devote all her energy to caring for her husband because he would be taking care of the family’s finances.
May also assured the family that Securities America conducted periodic inspections of his office in Rockland, Maryland. In the fall of 2017, Judith Jamieson grew concerned that May would be retiring soon and broached the possibility of moving her family’s accounts at Securities America to another brokerage. May persuaded her to hold off.
She finally decided to transfer the accounts in February 2018. The family’s new broker-dealer, which isn’t named in court papers, informed her they contained little to no money.
Assuming there had been a mistake, Judith immediately called May. He told her to talk to his criminal defense lawyer.
The Jamiesons weren’t May and Bell’s only victims. In December 2018, the SEC sued the father-daughter team in federal district court in New York for defrauding roughly 15 clients. May later pleaded guilty and was barred from the securities industry. Last October, the then-77-year-old was sentenced to 13 years in prison and ordered to pay more than $8 million in restitution and forfeit $11.4 million. Vania May Bell was sentenced the same month to more than 6½ years.
The SEC separately ordered Securities America in June 2021 to pay a $1.75 million civil penalty for failing to detect May’s fraud. It barred May from the industry on Feb. 14, 2019. Executive Compensation Planners’ SEC registration was terminated the previous year. Kevin Conway, May’s lawyer in his criminal trial, declined to comment. Securities America did not respond to requests for comment.
It’s a sad coda for the Jamiesons, who sold their home in Connecticut in December 2018 “to raise new funds and reduce their living expenses,” according to a filing in their ongoing civil lawsuit. “At a time in their lives when they hoped to enjoy the fruits of their hard work and to continue to work on Robert’s recovery from his stroke,” the filing said, “Robert and Judith Jamieson are, instead, figuring out how to restructure their lives to make ends meet.”