Q: I am dually registered as a registered representative of a broker-dealer and as an investment advisor representative of an independent RIA. I know that, as a Series 7-licensed rep, I can get paid commissions but the RIA I work for has the broker-dealer pay my commissions to them and then they keep a percentage and give me a payout. Can they do that?

A: Although you didn’t say so, I assume that the RIA firm is not itself dually registered as a brokerage firm. If that’s the case then, no, it should not be receiving the commission income.

An investment advisor cannot receive “transaction-based compensation” because it is not a “FINRA-member firm” (i.e., a brokerage firm). I assume that the brokerage firm is combining the advisory fees owed to the RIA with the commissions because it’s probably easier for them from an accounting standpoint but they are just asking for trouble here.

FINRA headquarters
Jessica Mathews

The way I typically see these relationships set up is that the brokerage firm will usually establish one account for the RIA and one account for each investment advisor representative. Then, when the brokerage firm pulls the advisory fees, the broker-dealer will deposit those fees into the RIA’s account and the commissions will be deposited into the respective registered rep’s account. The investment advisory firm will then pay to the registered rep or investment advisor representative their share of the advisory fees.

Depending on the employment agreement (or independent contractor’s agreement) between the investment advisor representative and the advisory firm, the investment advisor representative may or may not have to pay over a portion of his commission income to the firm.

Once the registered rep has “realized” the transaction-based income (i.e., the commissions), he or she can do whatever they want with it. They can pay their assistant or pay vendors for office supplies or give part of it to the advisory firm in accordance with whatever split they may have agreed to. But the advisory firm cannot “realize” that income initially and, therefore, the broker-dealer should not combine the advisory fees with the commissions.

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a senior consultant and vice president at NCS Regulatory Compliance, and a partner at the law firm of Dew Foxman & Haugh in Delray Beach, Florida.