Conflicts of Interest: Commission-Based Sales vs. Fee-Based Fiduciary Advice on Structured Notes
2026-09-26
Most investors evaluate a structured note by looking at its terms: the barrier, the participation rate, the term. Fewer stop to ask a different, equally important question: how is the person recommending this note actually paid, and does that shape what gets recommended?
Two Very Different Pay Structures
Structured notes can be sold through two broad types of relationships, and the difference matters more than most investors realize.
Commission-Based Sales
A commissioned broker or registered representative is typically paid an upfront commission each time a note is sold, embedded in the note's price. That compensation model creates a structural incentive, whether or not any individual representative acts on it, to favor shorter-duration notes and structures with frequent call observation dates. Every time a note is called, or a client is moved into something new, there's an opportunity for another commission.
This helps explain a pattern worth understanding: a commissioned seller may have an incentive to be pleased when a note gets called early, not just because the client's principal (plus any call premium) has been returned, but because it opens the door to placing that money into a new note and earning another commission. Autocall and issuer-call features are common in structured note design, and because they're built to redeem a note early when markets cooperate, notes with these features do get called fairly often, which can mean fairly frequent turnover under a commission-based relationship.
Fee-Based Fiduciary Advice
Cannon Advisors is an SEC Registered Investment Adviser, who serves as a fiduciary to our clients. We are compensated based on assets under management, not on a per-note commission. That distinction removes the incentive to "flip" a client from one note into the next simply to generate a new transaction. Our revenue is tied to the value of the account over time, not to how many notes we sell or how often a note gets called and reinvested.
Why a Long-Duration Note Can Actually Work Against Our Own Compensation
Here's a nuance that's rarely discussed, and one we think is worth being transparent about, since it cuts against our own short-term interest rather than in favor of it.
Many principal-protected or uncapped-participation notes are marked, meaning valued on a client's statement, based on the current value of the embedded options and the underlying bond, not simply on whether the note "feels" up or down. It's common for a note's marked value to sit below its original issue price for a meaningful stretch of a long term, particularly before the underlying has climbed back above its initial level. That's a function of how the note is priced along the way, not a sign that something has gone wrong.
Compare that to a portfolio of equities and ETFs, which is priced at a real-time, observable market value every day, and which has historically compounded over long periods at annualized returns often cited in the range of roughly 8-10% for U.S. stocks (a long-run historical average, not a guarantee; past performance never indicates future results).
Because our fee is based on the value of a client's account, a dollar sitting in a long-duration note whose marked value is below issue price for several years generates less revenue for us over that stretch than the same dollar would if it were simply invested in a diversified equity and ETF portfolio. If we were optimizing purely for our own compensation, that would be an argument against structured notes altogether, not for shorter ones.
Why We Still Use Structured Notes
We build and monitor structured notes anyway, when we believe the specific risk and return profile, whether that's downside protection, a defined income stream, or a view on a particular market range, genuinely fits a client's goals, time horizon, and risk tolerance better than adding more direct market exposure at that moment.
Doing this well is also simply more work than managing a portfolio of stocks and ETFs. It involves sourcing pricing from multiple issuing banks, negotiating terms, tracking call and observation dates across many notes, and coordinating what happens with the proceeds at maturity or an early call. We take on that extra work because we believe it's in the client's best interest, not because it's the most efficient or most profitable path for us.
Key Takeaways
- Commission-based compensation can create a structural incentive to favor shorter-duration, frequently-callable notes, since each call or rollover is a chance to earn another commission.
- Fee-based fiduciary advice, where compensation is tied to assets under management rather than transactions, removes that incentive to flip a client's notes.
- Long-duration notes often carry a marked value below their issue price for a stretch of the term, which can mean lower fee revenue for an AUM-based advisor compared to a portfolio of equities and ETFs compounding in real time.
- We continue to use structured notes because we believe the right structure, for the right client and goal, is worth the significant extra work involved, not because it's the most profitable choice for us.
- As with any investment decision, ask how the person recommending it is compensated. It's one of the most useful questions you can ask.
Further Reading
Structured notes are complex investments that involve risks, including potential loss of principal, issuer credit risk, limited liquidity, and early redemption features that may limit returns. They are not suitable for all investors and, except for certain market-linked CDs within applicable FDIC limits, are not bank deposits or FDIC-insured. Past performance is not indicative of future results. Investors should carefully review the relevant offering documents and consult their advisor before investing.
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This guide is educational, not personalized advice. Schedule a complimentary meeting with our team to talk through what it means for your goals.