A real estate broker who takes a percentage of the price your home sells for is a commission broker, but the term more often refers to those who work on commission at a brokerage firm. This can sometimes spell trouble, as the broker is paid based on the number of trades he or she executes.
So what are they incentivized to do? Make a lot of trades. In a practice called churning, an unscrupulous broker might make numerous trades in a customer’s account, even though the only benefit is for the broker. Since some securities offer a higher commission than others, the broker might be tempted to persuade the customer to buy those. A flat-fee broker, on the other hand, would hopefully put the customer’s best interests first and buy securities that are going to perform the best.
The brokerage firm that the commission broker works for also seems to incentivize churning and similar behaviors. The broker’s commission is split with the firm they work for, and the more trades they make, the higher their share of the commission will be. So if Hotshot Helen makes $600,000 in commissions, her spilt might be 60%/40%, meaning she gets to keep $360,000 and her firm gets $240,000. But Beginner Ben only generated $200,000 in commissions last month, so his split might be 30%/70%, giving Ben only $60,000 to keep.
If you are working with a commission broker, it’s always a good idea to keep a close eye on your monthly statements to look for a lot of trades within one industry, for example. If you don’t want to worry about it, you can always switch to a fee-based broker.
Related or Semi-related Video
Finance: What is commission?112 Views
finance a la shmoop. what is commission? well it's the greatest motivator for
salespeople in the world. it's the money some people make above and beyond their [ commission explained on a large screen]
salary. a little monetary carrot dangling out in front of a salesperson to you
know encourage them to sell sell sell. alright you're an agent who just sold a
house good for you. you get a 3% Commission. the house went for a million
bucks well you get 30 grand for the privilege or at least your brokerage
does, and then you get some piece of that. ok now you're the stock broker who sold
3 million shares of stock. well good for you
you get four cents a share in Commission 120 grand in the pocket of your
brokerage and you get some piece of that Commission. you're the Hollywood agent[equation]
who just inked Brad pitiful into a movie deal worth 20 million bucks, well good
for you your agency gets a 10% commission or two
million dollars. yeah that's for a Dewey Cheatham and Howe agency best one in
Hollywood. yeah they rep Harvey Weinstein. now for someone who's attempting to sell
a polished version of that Harvey Weinstein story well that's a commission
impossible. [man frowns]
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