Brokerage Commission House

What Is a Brokerage Commission House?

A brokerage commission house is a company that buys and sells various financial assets like stocks, bonds, and mutual funds, in return for fees.

The fee paid by clients of a brokerage commission house averages 1% to 2% of the amount being traded. The brokerage house may also receive commissions from sponsors of financial assets that they buy on behalf of their clients.

These firms are normally full-service brokerages that provide their clients with investment advice and research as well as trading services.

How Brokerage Commission Houses Work

The clients of brokerage commission houses are paying for the services of a financial professional. This may include personalized financial advice, investment research, and regular contact with the client.

Discount brokerages, which offer fewer services, generally charge a flat fee per trade that ranges from less than $5 to $30 or more depending on the type of transaction.

Online brokerages generally charge no fee for stock trades and exchange-traded funds (ETFs) while trades in some other types of assets such as bonds, mutual funds, and options may carry a small flat fee. They may offer tiered premium services for clients who want them, but their core services are entirely self-directed by the client.

House Services

Brokerage commission houses are paid for executing orders, arranging settlements, and servicing margin accounts on behalf of their clients. Unlike self-directed brokerages that allow their customers to place trades on their own for nominal fees, full-service providers including brokerage commission houses charge substantial commissions.

They typically use omnibus accounts to do this. These accounts permit trades to be bundled for two or more people. As such, transactions are fulfilled in the broker's name rather than the investors'.

Commissions and other fees, though, are charged directly to the investors. Trade confirmations and account statements are sent to each investor whose trades take place through an omnibus account.

Special Considerations

The various fees charged by brokerage commission houses can eat into an investor's principal.

For example, two mutual funds with nearly identical holdings may charge two different expense ratios—one with 0.6% offered by a traditional brokerage firm and the other with 1.6% through a commission house. The 1% goes back to the commission house.

This means a $10,000 investment in the lower-fee fund grows 10% over 20 years for a total of $60,300. The same investment in the fund bought through the commission house will grow to $50,200 given the same time period and interest rate.

The impact is even greater when it comes to load-mutual funds and annuities—two products that come with high fees in any case. Adding a commission of up to 10% on the principal means investors in these products pay a hefty chunk of their earnings in commissions and fees.

Annuities

Annuities are financial contracts that are designed to provide individuals with a regular stream of income during retirement.

The annual cost for a variable annuity can range between 1% and 3%. Some annuities come with a back-end surrender charge for early withdrawals. That means if you cash out the annuity, you pay an exit fee, usually for seven years after the annuity is purchased.

Load Mutual Funds

Load mutual funds come with commissions or sales charges that are paid to the intermediary, such as the commission house. These funds come in three variations:

• An A-load fund includes a transaction fee paid upfront at the time of its purchase. For example, if you invest $10,000 in one with a 5% front-end load, $500 goes to pay the commission, leaving $9,500 to be invested.
• A B-load fund penalizes you if you sell it within a certain period. A 6% back-end load may be required if you sell the fund in the first year. The fee decreases each year until it reaches zero.
• A C-load fund has no back-load or front-load but it does include a sales charge. This is reflected in the expense ratio, which is much higher than that of a no-load fund.

Examples of Brokerage Commission House Trades

Here's a hypothetical example of how brokerage commission houses work. Let's assume an investor wants to buy a U.S. growth stock mutual fund. The amount involved is modest, say $10,000.

The investor could buy an A-, B-, or C-fund, and decides on the B-fund, having no intention of selling it for some years. After about six years, the B-fund converts to an A-fund.

If the same investor had $250,000 to invest, the A-fund would be a better choice because it has lower load fees.