What is an agency fee?
The brokerage fee is a fee paid to a broker. An intermediary discovers a transaction and draws the attention of another party to it. An intermediary is therefore the link between demand and supply. Without the intermediary, the other party would probably not have come across the transaction and therefore the intermediary has earned a fee.
The conditions for a brokerage fee may vary depending on the transaction. The brokerage fee is paid either by the buyer or the seller. The payment is usually a percentage of the completed sale.
The referral fee can also be used as an incentive. The payment, or the advantage for the agent, also increases their incentive to refer customers to companies. Contracts are generally not necessary for such agreements, but a contract can be advantageous for long-term relationships. In some cases, the referral fee is paid in the form of a gift, as there is no legal obligation to pay. This distinguishes the agency fee from the service fee.
Examples of an agency fee
Agency fees come in many forms. Some examples are listed below:
- The agency fee may be included in transactions. This is the case when a company purchases certain products from another company.
- Credit brokers who specialize in brokering loans to credit institutions are paid by the brokerage fee.
- Agency fees are also due in the event of a successful auction.
- Airlines pay certain agency fees to online portals that sell their flights. The costs are also incurred if the flight does not take place.
- An estate agent can charge a commission or brokerage fee for brokering real estate.
The problem of agency fees
Intermediary fees or commissions can be problematic if an intermediary acts as an advisor. Especially in the insurance business, but also in the brokerage of investment funds, intermediaries often act as “independent advisors”. However, this designation is often misplaced, because if a large part of the income of such an intermediary is based on brokerage fees or commissions, the intermediary is neither independent nor an advisor. Rather, an intermediary is then very much dependent, namely on the income from the brokerage fee and more of a salesperson than an advisor. There is a conflict of interest between the interests of the customer and the interests of the provider between which the intermediary establishes the contact. Caution is therefore advised if the intermediary offers the “advice” to the customer free of charge and his only income is generated via agency fees or commissions from a company. This is particularly common in Switzerland with mixed (death/disability mixed with fund savings) life insurance policies in pillar 3a (voluntary pension savings), where very high commissions are often paid out due to long terms. However, such brokerage fees can also still be found with certain investment funds, which are then usually financed via a front-end load paid by the purchaser of the fund.
When it comes to investment solutions in particular, it pays to take advantage of independent investment advice where the advisor waives any retrocessions, i.e. any remuneration such as brokerage fees, commissions, kick-backs or finder’s fees, in order to maintain their independence. Ideally, independent advisors disclose their fees transparently from the outset. This means that clients know what to expect in terms of costs and can weigh up the costs and benefits.