Commission
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What is a Commission?
Generally speaking, a commission is the payment received for a service, such as the purchase and sale of financial products or investments by a broker or bank advisor. Commission-based brokers and advisors earn their income by buying and selling products on behalf of their clients. A commission may be charged when an order is executed, canceled, or modified. Occasionally, commissions may be due for the expiration of an order. Art. 322b of the Swiss Code of Obligations governs the entitlement to commission in Switzerland. Commissions will not be paid if the transaction is not completed without the employer's fault, or if the third party fails to fulfill their obligations. Commissions are reduced if the transaction is only partially executed.
Example of the Calculation of the Commission
Assume an investor wants to buy fund units worth CHF 10,000 through an advisor. For this order, the advisor charges a commission of 2% (also known as a front-end load). In addition to CHF 10,000, a payment of CHF 200 must be made. As a result, the cost of the fund units, including the commission (front-end load), is CHF 10,200.
Let us assume that the value of the fund units increases from CHF 10,000 to CHF 10,500 within one year. As a result, the investor wishes to sell the fund units. This is also subject to a 2% commission (redemption fee). The realized profit amounts to CHF 500. Nevertheless, commissions were paid on both the purchase and the sale. There was a commission of CHF 200 for the purchase (front-end load) and a commission of CHF 210 for the sale (redemption fee) (2% of CHF 10,500). The investor's profit would have been reduced by CHF 410 due to commissions, and would only amount to CHF 90 in this example. As a result, the advisor would have earned significantly more than his client with a commission of CHF 410. There is also the option of charging commissions as a lump sum. In this case, a fixed amount is charged per transaction, regardless of the amount of the investment.
Commissions and Fees
There is a distinction between commissions and fees in the financial services sector. As an example, a fee is a lump sum payment made for the management of money. In some cases, this may be a fixed amount, while in others it may be a percentage of the total assets under management. Consequently, a fee can reduce the incentive for an asset manager to make trades solely on the basis of commissions.
When selecting a wealth manager, care should be taken to determine how and whether the wealth manager charges commissions or retrocessions. This is because commissions can result in conflicts of interest between the interests of the advisor and the investor. A competent and independent wealth manager should structure fees in such a way that her/his interests and those of the client are aligned. In addition, she/he should not try to sell investment products to the client using commissions or retrocessions that are not profitable for the client.
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