As you all know, over the last few years, many custodial broker-dealers such as Schwab and TD Ameritrade have reduced their trading commissions to zero on U.S. equities, most ETFs, and most Class A shares of mutual funds.

Historically, many custodial broker-dealers have offered Registered Investment Advisers (RIAs) the option of placing their clients custodial accounts in transaction-based or asset-based fee structures. Clients in asset-based fee accounts pay a fixed annual fee that covers an unlimited number of trades in the client’s account, whereas transaction-based accounts are charged a fee for each transaction in the account.

Asset-based fee structures were generally suitable for actively traded accounts that would result in a large number of transactions and associated fees. However, since the elimination of most transaction fees, asset-based pricing models may be placing clients at a disadvantage compared to transaction-based accounts because clients in transaction-based accounts are paying a negligible amount of fees. At this time, the few remaining advantages of an asset-based fee structure is the possibility of trading in international securities, alternatives, and institutional class mutual funds without incurring a transaction fee.

Unless the client is invested in a mutual fund portfolio that benefits from the advantages of an asset-based fee structure, clients may be better off if they pay for each of their transactions in lieu of being charged a higher asset-based fee.

Examiners are likely to question whether causing clients to pay more to save on trading expenses still makes sense. Asset-based fee arrangements have become far less attractive as trading costs go down. Please note that this issue is not limited to wrap fee programs. RIAs that do not retain any of the asset-based custodial fees are also being scrutinized by regulators because they are causing the client to pay a higher fee, even if the firm is not benefiting from that fee.


The fee arrangement that made sense at the inception of an advisory relationship may no longer be in a client’s best interest, especially if an adviser is using a custodial broker-dealer that is offering zero commissions on most trades. If an RIA is still recommending asset-based fee structures, the RIA will need to justify why they made that recommendation. RIAs will also need to document that they reevaluated their recommendation on a regular basis. The outcome of these reviews will be impacted by the types of investments being used and whether the custodial broker-dealer charges a transaction fee for each of them.

RIAs who select asset-based pricing for their client accounts should also implement policies and procedures to ensure that their bundled fee structure is in their client’s best interest at the beginning of the relationship and on an ongoing basis.

Unless an RIA has a compelling reason to recommend asset-based pricing, we are advising our clients to switch to a transaction-based model where possible.

About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.

RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 –