What is a 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.

Key Takeaways

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

Understanding a 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 of 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 that are 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.

Example of a Commission House Trade

For example, let's assume an investor is looking to buy a U.S. growth stock mutual fund. She has the option of buying an A, B, or C-fund. Because she is looking to hold the investment for 10+ years, she decides to go with the B-fund because of the longer time horizon. Because her investment amount is not large, she will not receive a break point with the B-fund, but after a long period of time, like 6 years, the B-fund converts to an A-fund.

Another example would be if another investor has a large amount of money to invest in the above scenario. Because he has $250,000 to invest, he decides to go with an A-fund because he gets a break on the load fees. Additionally, he is a long-term investor and is planning to hold this investment for 10+ years.