If you are not asking that question, FINRA may as its recent $350,000 fine levied against a major brokerage house indicates. In that instance, FINRA found that the brokerage charged 20,000 customers a total of $2.4 million too much for certain transaction fees.
For its part, the SEC is going after private equity firms because it has found in its examinations that there has been a high rate of deficiency on fee collection and expense allocation.
Even greater focus is being directed to firms that are dual registrants because those firms can move clients from fee-based to commission-based accounts. The conduct they are focusing on is called reverse churning. Reverse churning happens where a client pays a fee for assets under management, but then barely executes any trades, which would otherwise warrant the use of a fee-based account.
Whatever fee system your firm uses, make sure that you take the time to make sure that it fits your clients. If the client executes many trades, should the client be in a fee-based account. Conversely, for those clients who do not execute many trades a year, do you have that one in a commission-based account.
Each account should be examined when it is opened and at least once a year to make sure that it is in the proper account from a fee standpoint. Ask these questions now, and avoid your regulator answering them for you.
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