Advisory Fee

Kirkwall Planning Group bills new clients an annual advisory fee of $2,400 collected in full at the start of each year. Under the NASAA model rule, this billing practice requires the firm to:

1. A.Obtain the Administrator's written approval of its fee schedule before billing any client in advanceAdministrators do not pre-approve advisory fee schedules. Fee levels are governed by disclosure and by the prohibition on unreasonable fees rather than by prior authorization.
2. B.Place the prepaid fees in a segregated escrow account until the services have been performedNo escrow requirement applies to prepaid advisory fees. The rule addresses the resulting client exposure through financial disclosure rather than by restricting the adviser's use of the funds.
3. C.Include a balance sheet in the brochure it delivers to clients, because it requires prepayment of more than $500 six or more months in advancePrepayment above $500 collected six or more months ahead makes the client an unsecured creditor, so the model rule requires the adviser to disclose its financial condition through a balance sheet in the brochure.
4. D.Register as an adviser having custody of client funds, since prepaid fees are client assets held by the firmFees the client has paid belong to the adviser, not to the client, so collecting them is not custody. The concern is the adviser's solvency, which the balance sheet requirement addresses directly.

Why: Collecting substantial fees well before the services are rendered leaves clients as unsecured creditors of the adviser, so the model rule responds with a solvency disclosure. An adviser that requires prepayment of more than $500 six or more months in advance must include a balance sheet in the brochure it delivers to clients, letting them assess whether the firm can perform what it has already been paid for.

Sylvan Oak Advisers deducts its quarterly advisory fee directly from client accounts held at a qualified custodian and wants to rely on the NASAA fee-deduction accommodation. Each time a fee is deducted, the firm must:

1. A.Obtain the client's verbal approval of the dollar amount before the deduction is processedThe accommodation rests on written authorization secured up front plus contemporaneous invoicing, not on transaction-by-transaction verbal approval, which leaves no record an examiner could test.
2. B.Rely on the quarterly account statement from the qualified custodian to inform the client of the feeThe custodian statement is separately required and shows only that a debit occurred. It discloses neither the fee formula nor the asset base, which is why the adviser's invoice duty exists independently of it.
3. C.Send the qualified custodian notice of the amount deducted and concurrently send the client an itemized invoice showing the fee formula, the asset value used, and the period coveredThe accommodation requires written client authorization plus, at the time of each deduction, notice to the custodian of the amount and a contemporaneous itemized invoice to the client showing how the fee was computed, the value of assets it was based on, and the time period covered.
4. D.Deduct fees only quarterly and only in arrears, never in advance of services renderedBilling frequency and whether fees are charged in advance are disclosure and prepaid-fee balance sheet matters. Neither is a condition of the fee-deduction accommodation.

Why: Direct fee deduction is itself a form of custody, but an adviser can avoid the fuller custody safeguards by following a specific procedure: written client authorization obtained in advance, notice to the qualified custodian of each deduction, and a simultaneous itemized invoice to the client disclosing the fee formula, the asset value used, and the billing period. The client-facing invoice is the core of the accommodation because it lets the client independently check the arithmetic against the custodian's statement.