Embedded Commissions

• Author: Anita Indira Anand
• Pages: 53-59

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Embedded Commissions

Investor safety requires transparency and consistency throughout

the adviser-client relationship. Rules should be explicit, wrongdoers

should be punished, and titles should be used consistently to signify

qualications. The same principles apply to adviser compensation.

When an investor hands money over to an adviser in order to make an

investment, that investor should know how much of it is going toward

the value of the investment, and how much is going to the remuner-

ation of the adviser for their services. But this is not always the case.

A Controversial Compensation Structure

There are three basic models for adviser compensation: rst, advis-

ers may be salaried and paid an annual rate by the banks or other

institutions that employ them. Second, they may be compensated on

a fee-based structure, charging clients for the specic services they

provide, which the clients separately pay for, apart from the cost of

the investment itself. Third, they may be paid a commission whereby

the adviser collects some percentage of the money that changes

hands when a nancial product is bought or sold. This third struc-

ture aims to incentivize sales, which may mean that the advice given

will not align with the best interests of the investor.

1 IFSE Institute, “How do Financial Advisors Get Paid?” (2016), online: www.ifse.ca/

nancial-advisors-get-paid.