FINRA – the brokerage industry’s self-regulator - back in May made some noise when it announced it was reviewing broker-dealer sales of volatile structured products, high-risk financial instruments that firms liken to bonds in marketing materials but are often linked to small baskets of stocks tied to derivatives.
As is often the case, the bureaucrats at FINRA are missing the point when it comes to brokers and their firms selling high-risk products like structured notes, which have the potential for high returns but are loaded with risks.
Yes, to FINRA’s point a few months ago, firms are selling funky structured products and notes. Stifel Financial Corp., its ex-broker Chuck Roberts and the tens of millions of dollars in damages paid to clients are an indication of that.
But the issue is more pedestrian and ripe for FINRA to miss. Steep commissions firms are charging clients – often in the range of 2% to 3% - are being overlooked or even ignored, all to the potential harm of financial advisors’ clients.
While the commissions, known as concessions, for structured products, appear on trade confirmations, they do not show up on clients’ monthly or quarterly account statements, according to multiple senior industry executives.
Using the range of figures cited above, if a client buys $100,000 of structured notes, he or she is paying a financial advisor and broker-dealer commissions and concessions of $2,000 to $3,000, clearly on the high-end range in today’s financial advice industry.
Even more problematic is the sale of structured notes that are deemed “auto-callable;” market-linked instruments often tied to an index like the S&P 500. As the market continues to rise, the note hits its target, and the broker and firm have another chance for a sale and easy commission.
“The biggest banks are the issuers of these things, and they’re designing equity-linked notes or baskets of stocks that you expect be called,” said one senior industry executive, who spoke privately to InvestmentNews about structured products and sales commissions firms like his charge.
“Hypothetically, if notes get called each quarter, over the course of a year a broker could get 10% in commissions, while clients see an increase of 30% in the products,” the executive added. “A firm could never justify a broker making that ratio - 10% - of commissions to a client’s equity.”
I called a FINRA spokesperson this week and asked: Why doesn’t FINRA require the industry to report structured products commissions or concessions on client account statements?
The spokesperson declined to comment beyond its announcement from May that it was making inquiries into the product. In that announcement, FINRA said it was asking broker-dealers to state how brokers were paid or compensated for selling structured notes; it did not mention how those commissions were reported to clients.
And sales are booming. According to a post on LinkedIn by SP Intelligence, sales in 2025 for structured products reached $222 billion. That translates into $4.4 billion to $6.6 billion in commissions for brokers and their firms.
It’s not like we haven’t been here before – broker-dealers have a rich history of not being transparent with clients about charging fees and commissions for high-risk products.
Indeed, the current lack of transparency in broker-dealers sales commissions for structured notes is similar to the way the price of old nontraded real estate investment trusts were reported.
Meanwhile, because the real estate market was extremely volatile, nontraded REITs were priced at par – typically $10 per share – for years, although brokers and firms charged commissions and fees of 10%.
REITs that were listed as $10 per share could become, eventually, valued on account statements at $7 or $8 per share, without the client being told why or how.
FINRA eventually wised up and changed those rules after a series of nontraded REITs became high-profile public embarrassments to the financial advice industry in the years after the credit crisis.
FINRA right now, today, should seriously consider making similar changes to the pricing of structured notes.
My guess is it won’t. FINRA is a Securities and Exchange Commission regulator trying to placate an industry during the time of a pro-business, anti-regulation Republican administration and is afraid of the risk.
The questions are clear.
Shouldn’t clients know the commissions – in this case “concessions” – they are paying to their financial advisor and firm?
And do financial advisors even bother to read the prospectus of the structured product they’re selling? Do they understand these products?
The less transparent broker-dealers are with clients and the commissions they pay, the less trust investors have with brokers, financial advisors and the vast money machine known as Wall Street.
Going forward, broker-dealers that value trust will be the ones that win client business and, eventually, thrive.
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