Investor advocates always suggest you inquire as to the method of compensation of "advisors" (actual registration category is Dealing representative or salesperson). This is because most “advisors” work to the suitability standard. Under this standard these advisors are not required to act in your best interest. They need only recommend investments that are suitable; not the best or cheapest or least risky. Knowing the method of compensation gives valuable clues as to how they will behave and how you might be able to interpret their recommendations.
In this ALERT we look at the compensation grid, a grid that depicts what percentage payout advisors will receive based on sales in a certain period of time. These complex grid structures are designed by the dealer to skew the recommendations made by investment advisors. The grid clearly puts "advisors" in a conflict-of-interest as the more they sell, the higher percentage commission rate they will receive.
Here's an illustrative sample :
Some dealers have creative exceptions to the grid, with sales of certain types of products given special payout rates. For example, a dealer may give special incentives to sell proprietary actively-managed mutual funds, new equity issues that it underwrites (IPO’s), or securities of which it has excess inventory that it is eager to reduce . These exceptions and bonuses can be permanent or temporary. All can be harmful to the unsuspecting investor.
The full-service brokerages all have different grids. Fixed payouts can vary with some paying higher than 70% and some paying lower. And not all flat-fee dealers charge the same flat fee to their advisors. The dealers are free to structure the commission payouts as they see fit, and there are no specific rules or regulations which they have to comply with other than certain disclosures.
Compensation grids and sales targets are coming under greater scrutiny as the Investment Industry Regulatory Organization of Canada (IIROC) steps up an assessment of how the country’s investment dealers handle compensation-related conflicts. Investment dealers will be required to turn over their compensation grids as a standard item in every upcoming business compliance exam, so the self-regulatory agency can “better review dealers’ treatment of compensation-related conflicts,” IIROC has said. The grids will help determine whether clients are being put into investments that trigger richer rewards for Reps and dealers. A 2014-2016 IIROC review, which looked at how well investment firms are meeting a requirement to manage compensation-related conflicts in the best interest of the client, found that firms were relying too heavily on disclosure of conflicts without first addressing them with clients in another way. In other words, CAVEAT EMPTOR- the grid is after your money .