Section 11.3: Account Types, Trading Authority & Discretion

  • Fee-Based vs. Commission-Based Accounts

  • Wrap Fee Accounts (All-In-One Accounts)

  • Solicited vs. Unsolicited Trades

Fee-Based vs. Commission-Based Accounts:

💼 Fee-Based Accounts

  • The customer is charged a regular ongoing fee (monthly or quarterly).

  • Usually a percentage of the account’s total value (Assets Under Management, AUM).

  • Best for frequent traders who make multiple trades per period.

  • Not suitable for buy-and-hold investors who trade rarely.

💰 Commission-Based Accounts

  • The customer is charged a commission for each trade.

  • Commission = percentage of trade amount (smaller % for larger trades).

  • Best for infrequent traders or long-term investors.

Wrap Fee Accounts (All-In-One Accounts)

  • A single, bundled fee covers multiple services such as:

    • Asset allocation

    • Portfolio management

    • Trade execution

    • Administrative services

  • The fee is usually a percentage of assets under management (AUM).

  • These are considered investment advisory accounts, meaning:

    • The broker-dealer must meet fiduciary standards.

    • The firm must register as an Investment Adviser under the Investment Advisers Act of 1940 or state law.

Solicited vs. Unsolicited Trades:

Trade Type / Who Initiates Trade / Marking Requirement

  • Solicited Trade / BD or registered representative recommends it / Must be marked “Solicited” on trade ticket

  • Unsolicited Trade / Customer initiates trade on their own / Must be marked “Unsolicited”

  • ⚠️ Mislabeling a solicited trade as unsolicited is a regulatory violation.

    Example:

    • Rep suggests a fund → customer buys it later = Solicited.

    • Customer calls out of nowhere to buy a stock = Unsolicited.

Fees & Commission

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Fees & Commission 〰️

Discretionary Accounts:

  • A discretionary account allows a representative to trade without the customer’s direct approval for each trade.

  • This authority is granted through a Power of Attorney (POA).

  • 🧩 The Three A’s of Discretion

    Every trade has three key elements:

    1. Action – Buy or Sell

    2. Amount – Number of shares or dollar amount

    3. Asset – The security being traded

    If the rep chooses any of these 3 A’s without client direction → it’s a discretionary trade.

    ⏰ Time & Price Exception

    • If the rep only chooses when (time) or at what price to execute a client’s order, it’s not discretion.

    • This is called Time and Price Authority — it does not require written authorization.

Examples:

  • ✅ Non-Discretionary Trade:

    • Client says: “Buy 100 shares of Falcon at the best time today.”

      • Action: Buy

      • Amount: 100 shares

      • Asset: Falcon
        → Rep chooses only time and price = NOT discretionary.

  • ⚠️ Discretionary Trade:

    • Client says: “Use $10,000 to buy a good tech stock.”

      • Action: Buy

      • Amount: $10,000

      • Asset: Not specified
        → Rep chooses the asset = Discretionary trade.

📝 Rules for Discretionary Authority:

  • Customer must give written authorization granting discretion.

  • A firm principal must approve in writing.

  • Discretion belongs to the representative, not the broker-dealer.

  • Authority ends if the rep dies or leaves the firm.

✺ Review questions ✺

  • A. Commission-based account
    B. Fee-based account
    C. Wrap account
    D. Margin account
    ✅ Answer: B. Fee-based account

  • A. Commission-based account
    B. Fee-based account
    C. Wrap account
    D. Discretionary account
    ✅ Answer: B. Fee-based account

  • A. Margin lending only
    B. Portfolio management, trading, and admin services
    C. IRA contribution management
    D. Custodial services only
    ✅ Answer: B. Portfolio management, trading, and admin services

  • A. Discretionary
    B. Unsolicited
    C. Solicited
    D. Time and price order
    ✅ Answer: C. Solicited

  • A. The rep chooses the time to place an order.
    B. The rep chooses the price only.
    C. The rep chooses which stock to buy with client funds.
    D. The client specifies all three A’s before trading.
    ✅ Answer: C. The rep chooses which stock to buy.

  • A. Action, Amount, Asset
    B. Action, Account, Authorization
    C. Asset, Approval, Agreement
    D. Action, Authorization, Amount
    ✅ Answer: A. Action, Amount, Asset

  • A. Can be oral
    B. Must be written and approved by a principal
    C. Lasts indefinitely, even if rep leaves the firm
    D. Belongs to the BD, not the rep
    ✅ Answer: B. Must be written and approved by a principal