What is a commission?
A commission is the payment for a service that a broker or bank advisor, for example, receives for the purchase and sale of investments or financial products. Brokers or advisors who work on a commission basis earn their money by buying and selling products on behalf of their clients. Commissions can be charged when an order is executed, canceled or changed. In some cases, commission may also be payable for the expiry of an order. In Switzerland, the entitlement to commission is governed by Art. 322b of the Swiss Code of Obligations. The entitlement to commission lapses if the transaction is not executed through no fault of the employer or if the third party does not fulfill the obligation. If the transaction is only partially executed, the commission is reduced.
Example for calculating the commission
Suppose an investor wants to buy fund units worth CHF 10,000 through an advisor. The advisor charges a commission of 2% (also known as the front-end load) for this order. In addition to the CHF 10,000, there is therefore a payment of CHF 200. The purchase of the fund units including the commission (front-end load) therefore costs CHF 10,200.
Assume that the value of the fund units increases from CHF 10,000 to CHF 10,500 within one year. The fund units are to be sold at the request of the investor. This also incurs a commission of 2% (redemption fee). The profit made on the fund units amounts to CHF 500, but commissions were paid for the purchase and sale. The commission for the purchase of shares(front-end load) amounted to CHF 200 and the commission for the sale of shares (redemption fee) amounted to CHF 210 (2% of CHF 10,500). In this example, the investor’s profit would have been reduced by CHF 410 due to the commissions and would only amount to CHF 90. With a commission of CHF 410, the advisor would therefore have earned considerably more than his client. Commissions can also be charged on a flat-rate basis. In this case, a fixed amount is charged per transaction, regardless of the amount of the investment.
Commissions and fees
In the financial services sector, there is a difference between commissions and fees. A fee is, for example, the payment of a lump sum for the management of money. This can be a fixed amount, for example, or a percentage of the total assets under management. A fee can therefore help to reduce the asset manager ‘s incentive to do business solely for the sake of commission.
As commissions can lead to conflicts of interest between the interests of the advisor and the investor, attention should be paid to how and whether an asset manager charges commissions or retrocessions, for example, when selecting an asset manager. Good, independent asset managers structure their fees in such a way that the interests of the client and the asset manager are aligned and do not try to sell clients investment products that are not profitable for them on the basis of commissions or retrocessions.