Reviewed by Sep 30, 2020| Updated on
There are significant differences between commissions and fees, at least in how those terms are used to characterize the financial services offered by the industry's skilled advisors.
A commission-based broker or advisor makes money through the sale of investment products such as mutual funds and annuities through transactions with the money of the investor. Sales among family members are often equity gifts which are not commission-based.
A fee-based consultant charges a flat rate to handle the money for an investor. The consultant charges could be either a rupee amount or a percentage of managed assets (AUM).
Full-service brokerages generate a large part of their profit from charging commissions on the client's transaction. Commissions vary widely from brokerage to brokerage with each having its own fee structure for different services.
Commissions may be charged if an order is completed, cancelled, or altered, and even if it expires. In many other situations, no commission is charged when an investor places a market order which goes unfilled.
If the order is cancelled or amended, however, the investor may find additional fees added to the commission. Limit orders which go partially filled will often incur a fee, occasionally on the pro-rata basis.
Financial advisors also advertise as being more fee-based than commission-based. Consequently, the advisor makes more money by selling products that offer higher commissions, such as annuities or universal life insurance, and more often by moving the money of the client frequently.
A professional consultant has a fiduciary responsibility to offer the investments which best serve the interests of the client. That being said, a commission-based advisor may attempt to steer clients towards investment products paying generous commissions.