Subscription-based Advisory Fees: Investor Bulletin
Sept. 6, 2023
An increasing number of investment advisers are charging clients subscription-based fees, rather than more traditional asset-based fees, for their investment management services. Many of these advisers are robo-advisers who market their services to new investors who may not yet have an investment account or may only have a small amount to invest. The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors, especially new investors, about these types of fees.
What is a subscription-based fee?
A subscription-based fee is a set, recurring fee that you pay for a particular service, typically on a monthly basis. For example, if you have a smaller account at a robo-adviser, the adviser might charge you a subscription-based fee of $3, $5, or $10 per month for providing the investment management services described in the agreement you enter into with the adviser.
How do most investment advisers charge for their services?
Investment advisers charge a variety of fees, including hourly fees and engagement fees, for their services. But the most common payment method is an asset-based fee, which is calculated as a percentage of the assets in your account. An asset-based fee is commonly paid at the end of each quarter. As the value of the assets held in your investment account change, the dollar amount paid in fees also changes. You pay this fee in exchange for the investment management services described in your agreement with the adviser. Asset-based fee rates vary depending on the nature of those services and the size of the account, but typically are stated as an annual fee rate, such as 0.25%, 1%, or 2% of the assets your adviser is managing for you.
What do these different fees mean for me?
Paying a subscription-based fee of $3 or $10 per month for investment advisory services might appear inexpensive. However, for investment advisory accounts with lower balances, small monthly fees like these can add up to a large percentage of the amount invested, and can end up being more expensive than traditional asset-based fees.
Are there other risks to consider with subscription-based fee accounts?
- Having smaller account balances. Another potential risk, especially for accounts with lower balances, is that subscription-based fees can quickly eat through an account, or make it impossible to earn more from investments than the fees charged. This means that money in your account could quickly disappear as it is used to pay for these periodic fees. Or, your account may struggle to grow in size – even if your investments are increasing in value – because those increases are being used to pay the periodic fees. This is true particularly as time compounds the effects of the fees on your account. In other words, as fees lower your account balance, they become a larger percentage of your remaining money.
- Cancelling your account. In addition, it is important to understand what happens when you cancel your investment advisory agreement. Some advisers only offer proprietary investment products. Cancellation may require the sale of some (or all) of the investments held in your account. This can happen in any type of advisory account, including in subscription-based fee accounts. With any type of account, it is important to understand whether you can transfer your investments to an account that is not managed by the adviser.
What can I do to address these risks?
First, do the math. Calculate what the subscription-based fee you are paying or considering paying would cost you as a percentage of your account if it were a traditional asset-based fee. Does this fee structure make sense for the current, or anticipated, size of your account? For example, if you plan to regularly add money to your account, the fee may be more affordable than if you are relying on investment growth to increase the size of your account. Keep in mind, however, that depending on your initial or future account balance, you may not have the option of choosing an asset-based fee. For example, an adviser that charges an asset-based fee might require a higher minimum balance or an adviser that charges a subscription fee for a lower-dollar account balance may convert your subscription fee to an asset-based fee once your account reaches a certain dollar amount.
Second, understand and consider what services you will receive for these fees and whether they are important to you. You are paying an investment adviser to give you advice in regard to your securities investments. Will the adviser monitor your account and check in with you? If so, how frequently? How often will the adviser update its investment advice? Is there a person you can communicate with about the services you will receive and/or the fees you will be charged? Will the adviser have the discretionary authority to make trades in your account, or will your pre-authorization be required for every trade? Are the advisory services you will receive with your account consistent with your needs? If not, you may want to consider whether an advisory account is the right type of investment account for you, or whether a brokerage account might make more sense. To learn more about how advisers and brokers are different, go to Investor.gov/CRS | Investor.gov.
How do I find out about an investment adviser’s fees and services?
Investment Advisory Agreement. Your investment advisory agreement will give you specific information about the fees you will pay and the services you will receive. Before you enter into any relationship with an investment adviser, it is important to read this agreement.
On a website or mobile app, an investment advisory agreement may look like the standard “I agree” check-box. This agreement will include important information about your account, including the services your adviser will provide and the fee structure you will pay. This is a legal document – so it is very important to read your investment advisory agreement before you “sign” it by clicking the box.
In addition, read any Terms of Service or similar agreements provided in the adviser’s mobile app or on its website. Information or terms in those agreements might be incorporated in your advisory agreement (or vice versa).
Entering into a relationship with an investment adviser without closely reading these agreements could cause you to agree to terms you may not want.
Forms CRS and ADV. Form CRS (also called the client relationship summary or Form ADV Part 3) will give you a summary of the fees an adviser charges and the services it offers. If you would like additional generalized information, you can read the adviser’s responses to Item 4 and Item 5 in its Form ADV Part 2A (also called the adviser’s brochure). Read our Investor Bulletin: Relationship Summaries (Form CRS or Form ADV Part 3) and our Investor Bulletin: Form ADV- Investment Adviser Brochure and Brochure Supplement to learn more. You can get an adviser’s client relationship summary and brochure by using the Check Out Your Investment Professional search tool at Investor.gov. If you have questions about using the search tool, read our Investor Bulletin: How to Use the Investment Professional Search Tool.
Conversation Starters. In addition, talk to a person at the investment adviser, if possible, about the adviser’s Conversation Starters. Conversation starters are helpful questions that are included in the adviser’s client relationship summary. If the adviser is a robo-adviser, it might not have a person you can speak with. If that is the case, the adviser should have written answers to the Conversation Starters online, each of which should be linked to the adviser’s client relationship summary.
For more information about robo-advisers read our bulletin, Investor Bulletin: Robo-Advisers.