Can a Fiduciary Receive Commissions?

Individuals seeking professional guidance often wonder if a fiduciary can receive commissions. Clients place considerable trust in fiduciaries, expecting them to act with integrity and prioritize client interests. Understanding fiduciary compensation is important for upholding this trust and helps clients make informed decisions about their financial and legal relationships.

Defining a Fiduciary

A fiduciary is an individual or entity entrusted to act on behalf of another party, known as the client or beneficiary. A fiduciary’s primary responsibility is to act in the client’s best interest, placing the client’s needs above their own.

This role is underpinned by two fundamental duties: loyalty and care. The duty of loyalty requires the fiduciary to act solely for the client’s benefit, avoiding self-interest or conflicting motives. The duty of care mandates that the fiduciary exercise reasonable diligence and prudence when making decisions or providing advice. Common examples of fiduciary relationships include financial advisors, trustees, executors, and attorneys.

Commissions and Conflict of Interest

A commission is a payment received for selling a product or service, often calculated as a percentage of the transaction’s value. This compensation model differs from fee-based or fee-only arrangements, where professionals are compensated directly by the client through hourly rates, flat fees, or a percentage of assets under management.

The receipt of commissions by a fiduciary can introduce a conflict of interest. This arises because the fiduciary might be incentivized to recommend products or services that yield higher commissions, even if those options are not the most suitable or cost-effective for the client. Such an incentive can compromise the fiduciary’s duty of loyalty. This inherent tension highlights why compensation structures are a central consideration in fiduciary relationships.

Rules for Investment Advisers

Investment advisers are a common type of fiduciary, and their compensation structures are subject to specific regulatory frameworks. Registered Investment Advisers (RIAs) are regulated under the Investment Advisers Act of 1940. This act imposes a fiduciary standard, requiring RIAs to act in their clients’ best interest, including duties of loyalty and care. Under this standard, RIAs generally operate on a fee-only or fee-based model, where direct commissions from product sales are typically avoided or strictly disclosed.

In contrast, broker-dealers traditionally operated under a suitability standard, meaning recommendations only needed to be suitable for the client’s financial situation, not necessarily in their best interest. However, the Securities and Exchange Commission (SEC) adopted Regulation Best Interest (Reg BI) to enhance the standard of conduct for broker-dealers. Reg BI requires broker-dealers to act in the “best interest” of their retail customers when making recommendations, without prioritizing their own financial interests. This involves fulfilling disclosure, care, and conflict of interest obligations. While Reg BI elevates the standard for broker-dealers, it does not impose the full fiduciary duty that applies to RIAs under the Investment Advisers Act of 1940.

For certain retirement accounts, including those covered by the Employee Retirement Income Security Act of 1974 and Individual Retirement Accounts (IRAs), the Department of Labor (DOL) introduced Prohibited Transaction Exemption (PTE) 2020-02. This exemption allows investment advice fiduciaries, including RIAs and broker-dealers, to receive compensation that would otherwise be prohibited, such as commissions, 12b-1 fees, or revenue sharing. To rely on PTE 2020-02, fiduciaries must adhere to “Impartial Conduct Standards,” which mandate acting in the retirement investor’s best interest, charging only reasonable compensation, and making no materially misleading statements. Additionally, the exemption requires specific disclosures, including acknowledging fiduciary status in writing and providing written reasons for rollover recommendations.

Rules for Other Fiduciary Roles

The ability to receive commissions also varies for other fiduciary roles. Trustees, who manage assets held in a trust for beneficiaries, are generally entitled to reasonable compensation for their services. This compensation is typically determined by the trust document or by state law, often as a percentage of the trust assets, an hourly rate, or a flat fee. Direct commissions from third parties for specific transactions within the trust are not a common or permitted form of payment, as it could create a conflict with their duty to the trust.

Executors, responsible for administering a deceased person’s estate, are also entitled to compensation, often referred to as commissions. This compensation is typically a percentage of the estate’s value, calculated according to state statutes. Executor commissions are considered taxable income and are paid directly from the estate’s assets before distribution to beneficiaries.

Attorneys, who serve as fiduciaries to their clients, primarily earn compensation through fees for legal services rendered. These fees can be hourly, flat, or contingent, depending on the nature of the legal work. Ethical rules governing attorneys emphasize that fees must be reasonable and that any fee-splitting arrangements must be disclosed and consented to by the client. While attorneys may receive payment from third parties on behalf of a client, strict ethical guidelines ensure that the attorney’s independent judgment and loyalty remain solely with the client, precluding situations where commissions from external sources could compromise this duty.