Compensation & Conflicts

Compensation charged by investment advisers for providing investment advice and portfolio management services, typically calculated as a percentage of assets under management (AUM). Must be disclosed in Form ADV Part 2A, subject to a reasonableness standard, and generally cannot be based on performance unless the client qualifies as a qualified client (generally $1.4M+ under management or more than $2.7M net worth excluding the primary residence, under the SEC order effective June 29, 2026).

Example: An investment adviser charges a tiered fee structure: 1.00% annually on the first $500,000 of AUM, 0...

The difference between the prevailing market price of a security and the price a dealer charges or pays a customer in a principal transaction. A markup occurs when a dealer sells to a customer at a price higher than the prevailing market price; a markdown occurs when a dealer buys from a customer at a price lower than the prevailing market price. Both must be fair and reasonable based on current market conditions, and in certain transactions they must be disclosed on the customer confirmation. Subject to FINRA's 5% Policy, a guide (not a rule) adopted because most customer transactions carried a markup of 5% or less; a markup above 5% can be fair, and a markup of 5% or less can still be unfair, because the percentage is only one of the factors considered.

Example: A broker-dealer purchases 500 shares of XYZ Corp at $50 per share ($25,000 total cost) and immediate...

A persistency bonus is additional compensation paid to an insurance agent or registered representative if a client maintains a policy or annuity beyond a defined threshold (typically 2-7 years). The bonus rewards long-term retention of the contract and is intended to align the agent's incentive with the client's interest in keeping the policy in force.

Example: An insurance carrier pays a registered representative an upfront commission of 6% on a variable annu...

An arrangement where investment advisers use client brokerage commissions to obtain research and brokerage services from broker-dealers. Section 28(e) of the Securities Exchange Act provides a safe harbor allowing advisers who exercise investment discretion to pay higher commissions if they determine in good faith that the commission is reasonable in relation to the value of the brokerage and research services, which must provide lawful and appropriate assistance in investment decision-making. Permitted items include research reports, financial analysis, and portfolio management tools. Items outside the safe harbor include office rent, equipment, travel, marketing, and administrative expenses. Must be disclosed in Form ADV Part 2A.

Example: An investment adviser directs client trades to Broker XYZ, which charges $0.08 per share instead of ...