Reforming Payment Models for Securities and Advisory Services

Reform in the way financial institutions are paid for securities services and investment advice.

On the eve of Rosh Hashanah, a joint task force from the Bank of Israel, the Ministry of Finance, and the Israel Securities Authority published an interim report for public comments, proposing a major reform in the way financial institutions (mainly banks, TASE members, and other players) are paid for securities services and investment advice.

The reform proposes a fundamental makeover designed to increase transparency, enable comparison-shopping among various service providers, and thereby increase competition. It also seeks to shift from a “covert payment” model to a model of “overt direct payment.” The proposed changes will inevitably affect the revenue and operating models of all entities operating in this market. The task force invites the public to submit comments on the interim report by November 30, 2025.

Key Principles of the Fee Model

The new fee model proposed by the task force is based on several key principles:

• A simple and easy-to-understand mechanism explaining the fee for each service.
• Tightening the congruence between the service and the fee.
• Shifting the emphasis toward direct fees to consumers instead of indirect fees from manufacturers (similar to changes implemented in European countries).
• Protecting customers with low-value securities portfolios.
• Offering uniform payment models for similar products (such as active and passive funds).
• Preserving money market funds as an alternative to financial deposits (i.e., currently, a customer buying or selling units of money market funds is not obligated to pay buy and sell fees and is exempt from paying securities management fees).

Competition between banks and TASE members has intensified in recent years, especially when vying for new investors entering the capital market. According to the Banking Supervision Department, in 2024, the ratio of securities trading accounts opened with non-bank TASE members out of all new accounts opened in the same period was about 47%, compared to only about 7% in 2019. However, the intensifying competition over new (mainly younger) investors is not yet affecting most veteran investors or their assets deposited in banks. Therefore, the task force believes there is a real need to take measures to revise the fee model.

Key Changes in the Fee Model

The proposed reform focuses on four main changes that fundamentally alter the current rules of the game:

1. Shifting the securities management fee (custody fee) from a “percentage” to a “fixed fee” – Currently, banks charge a securities deposit management fee as a percentage of the portfolio value, either quarterly or upon sale of the security, whichever is earlier. The reform proposes shifting to a much simpler mechanism: a fixed monthly fee in ILS. The monthly fee will be determined according to the value of the portfolio: up to ILS 100,000, from ILS 100,000 to ILS 400,000, and ILS 400,000 and higher.  

2. No more free investment advice – Until now, banking corporations could not charge a direct fee for investment advice, and advisory services were provided free of charge. The new model will enable both bank-based and independent investment advisors to charge a direct fee from clients. The fee will be calculated as a percentage for ongoing advice or as a fixed amount in ILS for one-time or digital advice.
3. Eliminating the distribution fee and replacing it with a reduced brokerage fee – Fund managers will pay a brokerage fee of 0.2% to advisors only for actual advisory services for all types of funds (apart from money market funds, which will remain as is, at a 0.1% distribution fee). The model proposes a one-year transitional period for existing holdings. This is a significant structural change that will directly affect banks’ revenues and fund managers’ fees, since the current distribution fee is higher (about 0.35% on average) and paid by fund managers to distributors (banks) for the total assets held (passive holdings).
4. Consolidating buy and sell fees in mutual funds – Investors will pay buy and sell fees for transactions with mutual funds, without distinguishing between passive and active funds. The model proposes a one-year transitional period for existing holdings. No changes will be made to buy or sell fees for transactions with money market funds.

Proposed Model: Advantages and Challenges

The task force believes the proposed fee model offers many advantages. A simple and transparent fee structure will improve clients’ ability to comparison shop, help in their decision-making process, and provide greater certainty. It will also raise clients’ awareness of the various advisory services and their positioning, as well as broaden access to such services for additional investors, while incentivizing higher quality of service. Finally, it will remove entry barriers and increase competition from non-bank advisors and other entities.

However, the proposed model also poses significant challenges. Chief among them is the concern over clients’ ability to change their consumer habits and start paying for services directly and consciously when, until now, they only paid for services indirectly, often without even realizing it. Furthermore, both distributors and fund managers are expected to experience revenue loss and will need to make significant adjustments to their existing systems to implement the new fee model. 

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Adv. Efrat Cohen is a senior partner in the firm’s Regulation Department. 

The Regulation Department is known for its pedigree in the international arena. We serve as the go-to law firm for foreign companies that require legal advice about their ongoing activities in Israel and assistance with the various regulatory requirements that apply to such activities. Our services to foreign companies include providing legal opinions, assisting in obtaining licenses and approvals, and guiding during transactions and when commencing activities in Israel. In addition, whenever necessary, we represent clients before the various regulatory authorities.