- Today, a new generation of brokerage accounts is available to investors. This new type of account contrasts with a traditional brokerage account in one important way: the client doesn't pay commissions on individual transactions. Instead of commissions, the client pays an annual fee, assessed quarterly, based on the size of the account.
The fee covers all the services rendered by the broker and his or her firm, including commissions, custodial services and, when applicable, portfolio management. These new types of brokerage accounts are primarily designed for accounts of $25,000 or more.
While the difference between a fee-based account and a per-trade commission account may appear small, the fee system's benefits to the client may be substantial. Under the commission system, a broker is compensated on the basis of the number and size of transactions executed. However, with a fee-based account, a broker's compensation is based on the value of the account. Because fee-based accounts are performance-driven, not commission-driven, the client may benefit. The fee-based broker has a greater personal stake in the success of each client's account.
Unlike some financial products conceived over the past decade, the fee-based account was designed from the client's perspective. A fee-based account puts the broker and the client on the same side of the table. When a fee-based account is established at most brokerage firms, the broker first develops a comprehensive investment profile for the client. The profile will define the client's risk tolerance, income needs, and overall investment objectives. This profile is usually completed before any investments are made. It serves as the blueprint for building a portfolio of stocks and bonds based on the unique characteristics of the client.
Then, as each quarter passes, the client receives performance reviews of the portfolio. The fee-based client knows exactly what the accounts returns have been, both on an absolute basis and compared to various indexes, like the S&P 500 or a bond index.
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