Assets Under Management

Investment advisers may be compensated by:

1. A.Only performance fees from anyonePerformance fees are the most restricted form of advisory compensation, not the only permitted one. They are available only for clients meeting the qualified client standard, while hourly, flat, and asset-based fees are broadly available.
2. B.Only tipsAdvisory compensation is a contracted fee disclosed in advance, not a discretionary gratuity. A model in which payment depended on the client's goodwill afterward would leave the fee undefined, which the contract and brochure requirements are designed to prevent.
3. C.Only commissions on tradesSome advisers do earn commissions, typically through a dual registration, so this is not foreign to the industry. The error is the word only, since the recognized fee structures include hourly, flat, and asset-based arrangements as well.
4. D.Hourly, flat, AUM-based, or (for qualified clients) performance feesCorrect - the common fee structures.

Why: Advisers may charge hourly fees, flat fees, a percentage of assets under management, or performance fees (limited to qualified clients).

What most clearly distinguishes a fee-based advisory account from a traditional brokerage account?

1. A.Only fee-based accounts may hold mutual funds and exchange-traded fundsAssumes the product menu differs. Both account types can hold the same securities.
2. B.The customer pays one ongoing fee based on a percentage of assets rather than a commission per tradeCorrect. The compensation structure, an asset-based fee in place of transaction charges, is the defining difference.
3. C.A fee-based account is automatically discretionaryMixes up how the rep is paid with who makes the trading decisions; the two are independent.
4. D.Fee-based accounts are always cash accounts and can never use marginConfuses payment structure with borrowing. Margin eligibility is a separate feature.

Why: A fee-based account charges a single ongoing fee calculated as a percentage of assets under management, regardless of how many trades occur. A traditional brokerage account charges a commission on each transaction.

A financial professional charges clients 1 percent of assets under management each year, provides continuous portfolio advice, and owes clients a fiduciary duty at all times. This professional is acting as a(n)...

1. A.Investment adviserCorrect — continuous advice for an asset-based fee, with an ongoing fiduciary duty, is the adviser model.
2. B.Broker-dealerBroker-dealers earn transaction-based compensation; they do not charge ongoing asset-based fees for continuous advice in that capacity.
3. C.Market makerMarket makers are dealers quoting two-sided markets in securities — they trade, they do not advise clients for fees.
4. D.Transfer agentTransfer agents maintain issuer ownership records — they have no advisory relationship with investors.

Why: Ongoing fees tied to assets, continuous advice, and an always-on fiduciary duty are the defining traits of an investment adviser under the Investment Advisers Act of 1940.

An investment adviser charges a fee based on average assets under management. This fee arrangement is:

1. A.ProhibitedA percentage of assets is the standard advisory fee structure. What draws scrutiny is compensation tied to gains, not compensation tied to the size of the account.
2. B.A performance feeThis is the sharpest distinction the question tests. A performance fee is calculated on gains realized, while an assets-under-management fee is charged on the balance whether it rises or falls.
3. C.FraudFraud would arise from hiding the fee or misstating how it is computed. Charging a disclosed percentage of assets involves neither of those things.
4. D.PermittedCorrect - AUM-based fees are allowed.

Why: A fee based on a percentage of AUM is permitted.