Commission
Candlefocus EditorA commission is a payment a broker, financial advisor, or other intermediary receives in exchange for providing services. It is typically a percentage of the money generated by a sale and is collected by the intermediary when the sale is completed. Typically, commissions are received on the sale of stocks, bonds, financial instruments, commodities, insurance, and similar such investments.
There are two types of commissions, transactional commission and asset-based commission. Transactional commission is when a broker or advisor charges a set fee or percentage for the services performed in a particular transaction. This may cover advice, trade administration and execution, or any other services provided. Asset-based commission is typically a percentage (i.e. 1%) charged on the total amount held by a client and is paid to the broker or advisor regardless of whether the investments are bought or sold.
Full-service Brokerage Commissions
Full-service brokerages derive much of their profit from charging commissions on client transactions. These fees usually depend on the type of product that is being transacted. For example, a brokerage might charge a higher fee for a trade involving more complex investments such as options or commodities. On the other hand, commissions on simpler investments such as stocks may be lower.
Commission-based Advisor
Commission-based advisors make money from buying and selling products on behalf of their clients. They typically receive a commission (usually a small percent) of the total amount generated by each transaction. This type of commission-based structure is most often found with financial advisors or brokers that provide advice to their clients and execute trades.
Fee-based Advisor
In the financial-services sector, commissions and fees are different, where fees are a flat rate for managing a client's money. Fee-based advisors typically charge their clients a fixed fee for services such as consulting, financial planning, portfolio management, and tax preparation. They may also receive commissions from their clients for the sale of products or services.
No-commission Brokers
Today, most online brokers no longer charge commission for buying and selling stocks. Instead, they rely on other methods to generate revenue such as financing short sales, providing margin accounts, or collecting fees for various other services.
When selecting a broker or advisor, it is important to consider the full list of commissions they will charge. Additionally, be cautious of advisors that appear more interested in selling products just for the commissions they will generate, rather than selecting the best option for the client. Asking the right questions and doing your due diligence can help you determine if a particular broker or advisor is the right fit for you.