Series 66
Client Communication and Compensation Issues - Compensation
There are few specific restrictions on fees within either the Investment Advisers Act of 1940 or the USA USA
As mentioned above, performance-based fees are generally prohibited. Only two types of clients may be charged such a fee:
- Fees based on a percentage of assets under management
- Flat annual dollar amount for services agreed upon
- Brokerage fees on trades made for clients
- Wrap fees that cover all services (asset management and transactional fees) in one single annual fee
| Look Out There are a few exceptional cases in which an investment advisor can benefit from portfolio gains. Advisors can participate in capital gains (receive a performance-based fee) if the client:
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As mentioned above, performance-based fees are generally prohibited. Only two types of clients may be charged such a fee:
- Registered investment companies (mutual funds)
- An individual with an account value in excess of $1 million (Uniform Securities Act), OR
- An individual with an account value in excess of $750,000 and a net worth of at least $1,500,000 (Investment Adviser Act)
| Look Out! Don\'t confuse performance-based fees with performance guarantees - read the exam questions carefully. Remember that performance guarantees are always prohibited, while performance-based fees are generally prohibited, with the exceptions discussed above. |
| Exam Tips and Tricks Here is a question you might encounter on the exam: |
- based on the level of trading activity.
- based on a percentage of the value of all assets under management.
- based on a percentage of capital gains or losses in the account.
- based on any of the above
The correct answer is "b": options "a" and "c" are specifically prohibited.
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