What is a Commission Broker
A commission broker is an employee of a brokerage company who gets remunerated for the number of trades she executes. The commission structure can encourage unethical behavior by unscrupulous commission brokers. For example, a dishonest commission broker may engage in a practice called churning, which means they execute multiple trades in a customer's account for the sole purpose of generating more commissions. The additional trades do not benefit the customer.
Breaking Down Commission Broker
A broker who charges a flat fee for his services rather than earning a commission based on order size has more incentive to put the customer's best interest first. A flat-fee broker does not have an incentive to push a customer into certain securities because they are paying a high commission. Instead, he has an incentive to place the customer into the best-performing investments, so they remain loyal and continue to provide a steady source of business.
Commission Broker Duties
- Offer Advice: Commission brokers provide advice about what stocks to buy and sell. As they earn a commission for each trade they execute for the customer, they typically make solicited recommendations and suggest trade ideas to encourage trading volume.
- Provide Research: A commission broker usually distributes the brokerage company's proprietary research to customers. Research reports might include buy and sell recommendations to urge customers to trade.
- Account Management: Commission brokers who are full-service stockbrokers may make investment decisions on a customer’s behalf. Investors should review discretionary accounts frequently to ensure their broker is not overtrading to generate additional commissions. For example, a broker may be churning a customer’s account if they are buying and selling stocks that operate in the same industry.
Commission Broker Earnings
When a customer pays a commission to buy or sell a security, it gets split between the brokerage company and the commission broker. Typically, brokers who execute more trades receive a larger share of commission from their brokerage company. For example, a broker who generates $500,000 in commissions may receive a 60%/40% split, meaning they earn $300,000 and the brokerage company takes $200,000. A broker who makes $100,000 in commission may only receive a 30%/70% split, meaning they receive $30,000 and the brokerage company pockets $70,000. Brokerage companies increase a broker's commission splits as they produce more revenue to provide an incentive and generate more business.