Understanding Custodial Pricing

AssetvsTransactional_updated

An important consideration when opening an account is whether to select Transactional Based Pricing (“TBP”) or Asset Based Pricing (“ABP”) for the custodial fee.  Transactional Based Pricing is a fee charged for every trade made in the account and is priced per transaction.  Asset Based Pricing is a fee that allows for unlimited trading and is priced based on the value of assets in the account. ABP is determined by multiplying the net asset value in the account by the annual ABP rate.  For example, 0.12% on $1,000,000 will cost $1,200.00 per annum.

Fees vary from custodian to custodian, meaning you have the ability to choose the most suitable fee structure for your client based on the different custodial options.

 

Key components to consider when deciding on a fee structure:

  • Number of Trades: If needed, how many trades will it take to sell the existing positions and implement the portfolio? How many trades will occur in the account every year?  Some managers make up to 250 trades/year and others may only make two trades/year.
  • Account Size: For larger accounts, it may be more cost effective to choose transactional-based pricing.
  • Withdrawals/Deposits: Will account activity cause additional trading in the account

 

SAMPLE ANALYSIS

Your client has a $1,000,000 account, which they would like to transfer to custodian XYZ. Your client’s portfolio is going to consist of model A, model B, and model C.  Let us assume each model holds and average of 40 positions and turns the portfolio over twice a year. Initial investment will kick off 120 trades, and each turnover will kick off 240 trades, bringing our total to 600 trades a year. Assuming custodian XYZ charges $8.95/trade for TBP or 0.12% for ABP, we can compare the two options to determine which is a more suitable option for the client

Asset Based:

V.S.

Transactional Based:

$1,000,000 X 0.12%/year = $1,200  600 trades at $8.95/trade = $5,370

In most cases, as outlined above, the client would benefit from Asset Based Pricing. It allows clients to avoid high fees if trade volume is higher than expected, and protects them from being charged when withdrawing or depositing cash.