An essential element of an advisory agreement is the fee schedule. The biggest conflict every advisor has is fees. The advisor is literally taken cash from their clients. So, it’s essential that the advisor and the client are very clear about the fee calculation. David A. Nagler and his firm, New Line Capital, LLC, stand accused by the Securities and Exchange Commission for not doing so.
The firm’s advisory agreements had a a schedule of fee like this:
| Financial Assets Under Management | Fee Rate |
| Up to $500,000 | 1.5% |
| $500,001 up to $1,000,000 | 1.25% |
| Over $1,000,000 | 1.00% |
But the fee schedule then goes on to say that there is minimum annual fee of $10,000.
In the firm’s Form ADV brochure it adds “Regarding our minimum fee, we take care to assure that our standard advisory fee does not compute to be greater than 2% per annum.”
Some math:
| Financial AUM | Actual Rate | Fee |
| $ 400,000 | 2.50% | $ 10,000 |
| $ 500,000 | 2.00% | $ 10,000 |
| $ 600,000 | 1.67% | $ 10,000 |
| $ 700,000 | 1.43% | $ 10,000 |
| $ 800,000 | 1.25% | $ 10,000 |
| $ 900,000 | 1.25% | $ 11,250 |
| $ 1,000,000 | 1.00% | $ 10,000 |
For a client with $1 million or more, there’s no problem. For less, you have to make a choice whether to follow the fee schedule, the $10,000 minimum or the 2% cap.
The Securities and Exchange Commission was not happy about this uncertainty. It filed a complaint against Mr. Nagler and New Line.
The firm had $29 million in AUM. It was registered with the state of New Mexico. Of course, the anti-fraud provisions of Section 206 of the Investment Advisers Act applies to all investment advisers, regardless if registered with the SEC.
Actually, New Line used to be registered with the SEC by claiming to its principal place of business to be in Wyoming. Originally, New Line was SEC registered by having more than $25 million in AUM. Then Dodd-Frank raised the threshold to $100 million. New Line reorganized as a Wyoming entity to try to keep SEC-registration eligibility. The SEC brought an action in 2015 against New Line forcing it out of SEC registration and into state registration in New Mexico.
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