Can you accept commissions and be a fiduciary? Though it is rare (especially outside of ERISA plans), it is possible, as detailed by Duane Thompson. A rep may be a fiduciary and accept commissions if they can show a demonstrated process of discharging duties of care and loyalty to clients.
While Thompson's post is a bit technical, it provides a good background of the law and the things advisors need to be wary of if they want to act as a fiduciary while accepting commissions.
Here are the three types of scenarios in which a fiduciary may be accepting commissions:
- Commission-only RIAs, though rare, do exist. Out of more than 11,000 firms, only four accept only commissions. (There used to be five before Bernie Madoff took a sabbatical.)
- Though registered reps are not required to act as a fiduciary under federal law, there are laws in 40 states that may impose that duty regardless of the FINRA suitability standard. And, of course, reps are fiduciaries to their BDs.
- Advisors may be ERISA fiduciaries and accept commissions if they are levelized — even if commissions paid to the BD are variable. ERISA sets a higher standard of care than the Adviser Act, which requires disclosure. ERISA also mandates that fees must be reasonable as well as level.
Interestingly, Section 913 of Dodd-Frank, which gives the SEC the right to impose a uniform fiduciary standard, explicitly states that commissions cannot be prohibited. And the prevalence of dually registered advisors (so-called hybrids) creates the potential for advisors acting as fiduciaries and accepting commissions.
So while it’s possible to be a fiduciary and accept commissions, there’s a lot more work to do, especially in the form of disclosure. And in the case of ERISA fiduciaries, the fees must be reasonable as shown through a documented benchmarking process. Bottom line advice: The best way to manage conflicts is to avoid them.
