Sharing Profits and Loss in a Customer Account

One of the most important characteristics of a good securities professional is that their advice is objective and free from personal bias. That’s why the NASAA generally prohibits professionals from linking their compensation to the actual amount of profit or loss experienced in a customer account. In other words, aside from a few exceptions, securities professionals are prohibited from directly sharing in the profits or loss in a client account.

When this ethical standard is violated, it usually looks like one of two things. Most commonly, it occurs when a securities professional agrees to work for a percentage of any gains they earn for their client in a specified period (e.g., 20% of the profits earned during each calendar year). The other instance is when a professional promises to limit a client’s losses by reimbursing them in the event that their account heads south.

In both of these common cases, the reason behind this prohibition against “performance-based” compensation has to do with the belief that it’s difficult for securities professionals to focus on a client’s investment objectives whe