Trailing Commissions and Sales-Related Compensation

True or false, a CFP^® professional who receives trailing commissions cannot represent their practice as “fee-only” under any circumstance.  The answer may surprise you.  Read on to see why.

CFP Board “Standard A.12 of the Code of Ethics and Standards of Conduct provides that a CFP^® professional may not make false or misleading representations regarding the CFP^® professional's or the CFP^® Professional's Firm's method(s) of compensation. Trailing commissions are Sales-Related Compensation that would prevent a CFP^® professional from representing his or her or the CFP^® Professional's Firm's compensation method as ‘fee-only.’ A new FAQ addresses the limited circumstances where the CFP Board would find that a CFP^® professional who refers to his or her or the CFP^® Professional’s Firm’s compensation method as fee-only is not in violation of Standard A.12 [emphasis added], notwithstanding the receipt of trailing commission.”

In the FAQ, Question A.12.8 CFP Board tells us that if the CFP^®  professional receives no sales-related compensation other than trailing commissions and complies with three requirements, the CFP^®  professional is ethically compliant with Standard A.12 when representing their compensation method as “fee only.” Under the three requirements, the CFP^®  professional must:

• “Request a transfer or assignment of the Financial Assets paying trailing commission to a person or entity that is not a Related Party;
• Contact the entities paying the trailing commission that may not be so transferred and request that these entities discontinue paying any trailing commission; and
• Donate any and all remaining trailing commission to one or more 501(c)(3) organizations.”

Here’s the bottom line, a CFP^®  professional that receives trailing commissions may represent their compensation method as “fee-only” if neither they nor a related party keeps the trailing commissions!