How Should Financial Professionals Be Paid?

How Should Financial Professionals Be Paid?

How Should Financial Professionals Be Paid?

A look at an ongoing discussion that impacts retirement savers & investors.  


Decades ago, just about all financial services professionals were paid in the same way. They received sales or trading commissions linked to investment transactions.

This compensation method was the norm at brokerages, and it was hardly perfect. Brokers had to sell products and make trades to earn a living. They emphasized buying and selling, not retirement planning or wealth management.

The era of the broker has given way to the era of the financial advisor who emphasizes lifelong client relationships rather than investment transactions. The difference in the eras seems like night and day. The compensation method for financial professionals, however, has only recently begun to change.

Some financial professionals still receive the bulk of their income from commissions. This does not make them inferior to others in their profession; it does mean that they are working under a traditional compensation structure. Commission-based financial professionals commonly recommend investments to clients using a suitability standard – an investment is judged to be “suitable” for a client’s personal situation if it passes a strict multi-point test.1,2

Other financial professionals are fee-based. This means that they receive fees for providing advice or overseeing client portfolios. They may charge clients annual or monthly retainer fees for their services; alternately, the annual or monthly fee may be equivalent to 1% of a client’s invested assets under their management. In some cases, hourly or per-project fees may be charged. Fee-based advisors also earn commissions; those commissions are linked to investment and insurance products that may be integrated into the financial and retirement planning strategies they create. These financial professionals may make investment recommendations based on the suitability standard or under a fiduciary standard, which ethically and legally obligates them to act in a client’s best interest.1,2

Still other financial professionals are fee-only. They earn 100% of their income from fees directly paid to them by clients. (Such fees may be higher than those charged by fee-based financial professionals.) As fee-only financial professionals receive no commissions, they can recommend investment or insurance products without the potential for conflict of interest.1

A Department of Labor ruling may help shift the paradigm further. In early 2016, the DOL revised its rules pertaining to retirement savings accounts. It wants all financial professionals providing advice on these accounts to act as fiduciaries. While some waivers and exemptions will apply for certain financial professionals and their clients, the DOL’s message is clear and the fiduciary standard is slated to become the industry norm by January 2018.2

Financial professionals who currently work by a suitability standard and receive commissions face a dilemma as a result of the newly revised rules. If they want to advise anyone about their retirement account, they will have to uphold a fiduciary standard as a condition of this responsibility. (Many financial professionals already abide by a fiduciary standard, among them Registered Investment Advisors.)1,2

If they still want to receive commissions while advising retirement plan account holders, those account holders will have to sign a Best Interest Contract Exemption (BICE) acknowledging that the financial professional may earn commissions stemming from sales of financial products.3

In the near future, you may see more fee-based and fee-only financial professionals. The biggest effect of the oncoming DOL regulations may be an industry-wide embrace of the fiduciary standard, with the fee-based and fee-only compensation models possibly becoming widespread throughout the investment and insurance industries. Perhaps it represents not only change, but an evolution and refinement of the compensation standards for financial professionals.


This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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2 – [4/6/16]
3 – [7/24/16]

Timothy C. Hucks is a Certified Estate Planner™, an Investment Advisor Representative, and President of Rising Tide, Inc. He may be reached at or 919-819-2086.

Securities offered through Capital Investment Group, Inc. Corporate Office: 100 East Six Forks Road, Suite 200, Raleigh, NC 27609 • (919) 831-2370. Member FINRA/SIPC.