Compensation & Conflicts

Compensation charged by investment advisers for providing investment advice and portfolio management services, typically calculated as a percentage of assets under management (AUM). Must be disclosed in Form ADV Part 2A, subject to a reasonableness standard, and generally cannot be based on performance unless the client qualifies as a qualified client ($1.1M+ under management or $2.2M+ net worth).

Example: An investment adviser charges a tiered fee structure: 1.00% annually on the first $500,000 of AUM, 0...

The difference between a dealer's cost and the price charged to a customer in a principal transaction. A markup occurs when a dealer sells to a customer at a price higher than the dealer's cost; a markdown occurs when a dealer buys from a customer at a price lower than the prevailing market price. Both must be disclosed to customers and must be reasonable based on current market conditions. Subject to FINRA's 5% Policy, which is a guideline (not a firm rule) suggesting total transaction costs should typically not exceed 5% of the prevailing market price.

Example: A broker-dealer purchases 500 shares of XYZ Corp at $50 per share ($25,000 total cost) and immediate...

An arrangement where investment advisers use client brokerage commissions to obtain research and brokerage services from broker-dealers. Section 28(e) of the Securities Exchange Act provides a safe harbor allowing advisers to pay higher commissions if the services provide lawful and appropriate assistance in investment decision-making. Permitted items include research reports, financial analysis, and portfolio management tools. Prohibited items include office rent, equipment, travel, marketing, and administrative expenses. Must be disclosed in Form ADV Part 2A.

Example: An investment adviser directs client trades to Broker XYZ, which charges $0.08 per share instead of ...