Commission Broker

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.