Can my financial advisor sell me commission-based products?
It depends entirely on which kind of advisor you have hired. A pure broker, registered with a broker-dealer under the SEC's Regulation Best Interest, is paid commissions on the products they recommend — that is the structure of the job. A dual-registered advisor — someone with both a broker license and an investment adviser license — can sell you commission products in their broker capacity even if they also charge you a fee on a separate advisory account. A fee-based advisor uses a fee for some services and commissions for others. A fee-only fiduciary, by definition, cannot accept commissions on anything. The plain English test is to ask, in writing, "Are you ever paid commissions, 12b-1 fees, or third-party compensation on anything you recommend to me?" The answer determines whether you are dealing with a fiduciary or a salesperson with a license.
What counts as a commission product
The most common commission-paying products in retail advisory:
- Mutual funds with 12b-1 fees or front-end loads. The broker keeps part of the load and a recurring trail.
- Variable annuities. Commissions of 5% to 8% of premium are common, plus surrender charges that lock you in for years.
- Indexed and fixed annuities. Commissions can run 6% to 10% of premium and are paid by the insurer at sale.
- Non-traded REITs and limited partnerships. Up-front commissions of 5% to 10% are typical.
- Whole and universal life insurance. Commissions in the first year often equal 50% to 100% of premium.
- Class B and C mutual fund shares. Higher annual 12b-1 trails replace the up-front load.
What Reg BI changed and what it didn't
Regulation Best Interest, effective June 30, 2020, requires brokers to recommend products that are in the customer's best interest at the time of the recommendation. It does not eliminate commissions. It does not impose the ongoing duty of loyalty that an Investment Adviser owes under the Investment Advisers Act of 1940. Reg BI is a snapshot duty at the moment of recommendation. Fiduciary duty is a continuous duty across the relationship.
How to know what your advisor can sell you
Three checks:
- Look up the advisor on BrokerCheck. Look for an active broker-dealer registration in addition to any investment adviser registration.
- Read the firm's Form ADV Part 2A Item 5. The compensation section will say whether the firm or its representatives earn commissions or other sales-based compensation.
- Read the firm's Form CRS. "How do your financial professionals make money?" must answer this question in plain English.
The fee-only line
Fee-only fiduciaries cannot accept commissions on anything they recommend, ever, from any party other than the client. That is the structural rule that lets the fiduciary duty be practiced honestly across the entire relationship.