DEFINITION of Commission House

A commission house provides services for buying and selling all kinds of assets, including stocks, mutual funds and bonds — and charges fees for doing so.

Unlike self-directed brokerages that allow customers to place trades on their own and pay nominal fees, the commissions charged by these full-service providers are often steep and unnecessary.

BREAKING DOWN Commission House

This is especially true with respect to load mutual funds and annuities — two products that already come with high fees. Tack on commissions up to 10 percent on the principal amount, and investors wind up paying a big chunk to a commission house.

For example, annuities include a mortality and expense charge, fund management fees and fees to ensure your principal. The annual cost for a variable annuity can range from about 1 percent to as much as 3 percent. Plus, some annuities come with what are known as “back-end surrender charges.” This means if you cash out the annuity, you pay an exit fee typically during the first seven years of ownership.

Load mutual funds work this way: An A-load fund, requires that you pay a transaction fee when you buy it. For example, if you invest $10,000 in one with a 5 percent front-end load, $500 goes to pay the commission and $9,500 is invested.

A B-load fund, on the other hand, penalizes you if you sell it within a certain period. A 6 percent back-end load may be required if you sell in the first year and decreases a percentage each year until it reaches zero.

Finally, a C-fund neither imposes a back- or front-end load, but adds a sales charge into the expense ratio that is much higher than most no-load funds.

These types of fees can eat into principal. For example, two mutual funds with nearly identical in holdings, but one charges an expense ratio of 0.60% and the other 1.60%, your $10,000 investment in the lower-fee fund grows 10% over 20 years, for a total of $60,300. That same investment in the more expensive fund will grow to only $50,200, applying the same time period and interest rate.

Services might include transactions such as buying and selling bonds, stocks or commodities. More specifically, a commission house gets paid for executing orders, arranging settlement or servicing margin accounts on behalf of their clients. They typically use omnibus accounts to do this.