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Brokers who charge commissions are two to eight times more likely than advisors who charge fees to recommend risky investments. This is the finding of a survey done by the North American Securities Administrators Association (NASAA) of 516 financial firms with 1,552 investment advisors.
The information came from the NASAA’s audits of the firms. It found that the brokers who were compensated by commissions (broker-dealers) were seven to nine times more likely to recommend risky products like private placements, variable annuities, and non-traded REITs. The report found that "almost none" of the Registered Investment Advisors (RIAs) who charged fees recommended such products.
The obvious question is why.
Is it because the clients of the commission-compensated brokers were younger, high income earners, or more sophisticated investors who understood the inherent risks in these investments? This is highly unlikely. In my experience, people who own these products have a greater probability of being older, low income, or unsophisticated.
Risky investments like variable annuities, non-traded REITs, and private placements typically pay out high commissions – some as high as 10% – to brokers who sell them. For someone whose entire compensation comes from commissions, the choice between selling a mutual fund of REITs that pays a commission of 0.25% or a non-traded REIT that pays out 10% can be a tough temptation to overcome, regardless of which product would be better for the client. It would take 40 sales of the REIT mutual fund to equal the income from one sale of the non-traded REIT.
In a September 23, 2020, article in Financial Advisor, "BDs Selling Far Riskier Investments Than RIAs, NASAA Finds," Tracy Longo writes, "RIAs generally took more conservative investment approaches overall, 'avoiding higher cost, riskier, and complex products. Investment advisers also reported more robust due diligence, disclosure, and conflict management practices,' NASAA said."
Not surprisingly, a number of trade groups who represent the 2,000 firms that sell these products attempted to pressure NASAA to not go forward with the audit. To NASAA’s credit, Andrea Seidt, chair of the organization's Regulation Best Interest Implementation Committee, responded that the audit "would not be suspended."
Why were these firms so worried about the audit?
