lesson 11.3 Differentiate fee-based, commission-based, and wrap accounts.

Fee based accounts

• an account in which the customer is charged a regular and ongoing (annual fee) fee for all the trading in the account

• fee is change montly or quarterly

• best for investors that trade frequently but are not good for investors that take a buy-and-hold approach to investing.

• unlimited trades at no extra cost

Commission-Based accounts

• the customer is charged a fee (a commission) for every trade placed.

• These accounts are better for strategic investors that do not trade frequently.

Wrap Fee Accounts

• Accounts for which firms provide a group of services—such as asset allocation, portfolio management, executions, and administration—for a single fee

• an annual fee is paid based on the size of the account

• The fee may be a set monthly or quarterly amount, but it is most often a percentage of assets under management (AUM).

• generally, investment advisory accounts.

Solicitated trade

when a representative or a communication from a BD recommends the purchase of a specific security to a customer.

Solicited trades must be marked as solicited on the trade ticket (order form), if not marked

trade as unsolicited is a regulatory violation.

must be determined on solicited trades.

Suitability

If a client places a trade that has not been suggested by the BD or a representative,

it will be considered unsolicited.

If the registered representative is the one who recommended these bonds

the trade is solicitated

the client would need to specifically identify the bonds he wanted to purchase

unsolicited trade

Discretionary trade

A customer may give trading authority to a registered representative (RR) to place trades in the customer's account without the customer's permission.

Discretionary authority

• is a type of power of attorney that is granted by the customer to the RR

• These trades must be marked as discretionary; failure to do so is a serious violation.

What constitutes a discretionary trade?

• An action (buy or sell)

• The amount of the trade (shares or dollars)

• The specific asset to be traded (what you are buying or selling)

If one element of a discretionary trade is not present, the trade is considered

Non-discretionary or unsolicited

proper authorizations for a discretionary trade

• the client must agree, in writing, to grant a representative discretionary trading authority, and

• a principal of the firm must, in writing, approve the discretionary trading authority.

• Discretionary trades must be approved by a principal promptly after entry.

• A client who chooses to revoke the discretion must do so in writing

• Discretion is granted to the representative, not the BD.

time and price authority.

• When the representative ONLY choose the time or the price at which a trade is executed.

• is not considered discretion.