Neither model is cheaper. Which one is cheaper for this customer is an arithmetic question, and the firm has to ask it.
Two ways to pay for the same service
A commission account charges for each transaction. Nothing is traded, so no commission is charged, though other account fees may still apply. A fee-based account charges an ongoing fee measured against the value of the assets — often quoted as a percentage a year — and it is charged whether or not anything is bought or sold.
Keep reading: 5 more paragraphs (about 2 min)
That single difference decides everything else. Commissions rise with activity; an asset-based fee rises with the size of the account. A customer who buys four holdings and keeps them for a decade will usually pay far less in commissions than in a percentage of the portfolio every year. A customer who trades several times a week will usually pay far less as a percentage than in commissions. Neither model is generous or mean in the abstract, and any claim that one is always better is a claim about a customer, not about the model.
Each arrangement also creates its own conflict, in opposite directions. A commission account pays the firm more the more it trades, which is the pull behind excessive trading. A fee-based account pays the firm the same whether it does anything or nothing, which is the pull behind putting a customer who never trades into one and then leaving them there.
This is why the choice of account is regulated as advice rather than as administration. Regulation Best Interest applies when a firm makes "a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer", and requires it to act in that customer’s best interest without placing its own interest ahead. Proposing a fee-based account to someone who trades twice a year is a recommendation, and it has to be justifiable as one.
The obligation is met through four component duties: disclosure of the scope of the relationship, the fees and the conflicts; care, meaning a reasonable basis to believe the recommendation is in the customer’s best interest; the identification and management of conflicts; and written compliance policies. The first two are the ones a fee-based recommendation lives or dies by.
Disclosure starts before the first recommendation. A broker-dealer that serves retail investors must give each one its Form CRS, a short, plain-English relationship summary, before or at the earliest of a recommendation, an order or the opening of an account. It covers services, fees and costs, conflicts of interest, the standard of conduct and any reportable legal or disciplinary history. The firm also posts it online and sends it within 30 days on request. It adds to the firm’s other disclosures and replaces none of them.
Who counts as a retail customer
The rule depends on who receives the recommendation and what it is for. A retail customer is a natural person, or that person’s legal representative, who receives a recommendation and uses it primarily for personal, family or household purposes. A recommendation to someone acting for a company, a pension plan or a charity falls outside the term, and FINRA’s suitability rule governs it instead.
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Being a natural person is not enough on its own: a business owner advised on her company’s cash is acting for the business. Being wealthy does not take a person out of the term either; the SEC’s staff says an accredited investor can still be a retail customer. And an order the customer chose herself, with no recommendation, does not bring the rule into play, though she is still a retail investor who gets the firm’s Form CRS.
Exam terms (6)
- Commission account
- Charged per transaction; no trading, no charge.
- Fee-based account
- Charged an ongoing fee measured against the value of the assets.
- Asset-based fee
- The percentage charge itself, levied whether or not anything is traded.
- Account recommendation
- A proposal about which account to use; covered by Regulation Best Interest.
- Care obligation
- The duty to have a reasonable basis to believe the recommendation is in the customer’s best interest.
- Form CRS
- The firm’s short relationship summary for retail investors, due by the first recommendation, order or account opening.
Two charging models
| Commission account | Fee-based account | |
|---|---|---|
| What triggers the charge | A transaction | The passage of time |
| What it is measured against | The trade | The value of the assets |
| A year with no trading | No commissions; other account fees may still apply | Costs the full fee |
| Tends to suit | The customer who trades rarely | The customer who trades often |
| The conflict it creates | Trading more than the customer needs | Leaving an inactive customer paying |
Try it: Work these out before reading on. A customer with $200,000 makes four trades a year at $75 each, against a fee-based rate of 1 percent. A second customer with $250,000 makes 200 trades a year at $25 each, against the same 1 percent. Which model is cheaper for each, and by how much?
Check yourself
Try a question, then read the explanation to review the rule.
Opening your study record…
Worked example
Two customers are offered the same 1 percent asset-based fee as an alternative to their commission accounts.
- The first holds $200,000 and makes four trades a year at $75. Commissions cost $300; the fee would cost $2,000.
- For her the commission account is cheaper by $1,700 a year, and a recommendation to move would need a reason that is not about cost.
- The second holds $250,000 and makes 200 trades a year at $25. Commissions cost $5,000; the fee would cost $2,500.
- For him the fee-based account is cheaper by $2,500 a year, and the recommendation is easy to justify.
- Same fee, same two models, opposite answers. Which is why the firm has to look at the customer rather than at the product.
Same rule, new context
Opening your study record…
The closest contrast
Commissions rise with activity.
An asset-based fee rises with the account.
So the comparison is never between two products. It is between one customer’s expected trading and one percentage, and it has to be done for that customer.
Summary
- A commission account charges per transaction; a fee-based account charges an ongoing percentage of assets.
- An asset-based fee is charged whether or not anything is traded.
- Which model costs less depends entirely on how much the customer trades.
- Each model creates its own conflict: over-trading in one, inactivity in the other.
- Regulation Best Interest covers account recommendations, so proposing an account type is itself a recommendation.
- Form CRS reaches a retail investor before or at the first recommendation, order or account opening, and it adds to other disclosure rather than replacing it.
Related practice
- Cash vs margin and Regulation TPractice this
- Form CRS: relationship summary content and deliveryPractice this
- KYC and recommendation suitabilityPractice this
Sources
- SIE Examination Content Outline (2025) · FINRA · checked 2026-10-12
- 17 CFR 240.15l-1 — Regulation Best Interest · SEC · checked 2026-09-04
- 17 CFR 240.17a-14 — Form CRS, for preparation, filing and delivery of Form CRS (CFR, 2025 edition on govinfo) · SEC · checked 2026-10-09
- Relationship Summaries (Form CRS or Form ADV Part 3): Investor Bulletin — contents beyond services and fees (SEC Office of Investor Education and Advocacy) · Investor.gov · checked 2026-10-09
- Relationship Summaries (Form CRS or Form ADV Part 3): Investor Bulletin (SEC Office of Investor Education and Advocacy) · Investor.gov · checked 2026-09-04
- FINRA Rule 2111 — Suitability, Supplementary Material .08 (Regulation Best Interest) and .05(c) (quantitative suitability) · FINRA · checked 2026-10-09
- Frequently Asked Questions on Regulation Best Interest — Retail Customer · SEC · checked 2026-09-20