A broker by definition is anyone who facilitates a trade between two or more parties. Typically, brokers across different industries do not earn salaries, but earn commissions or fees based on the completion of an actual sale. In this sense, broker earnings are high-risk, high-reward. If you have a knack for selling and completing transactions, you can make a lot of money as a broker. However, brokers rarely earn a guaranteed salary.
A commission is a sum or percentage of a sale that brokers or other sales representatives earn upon completion of a sale. For example, a real estate broker may earn three percent of the sale price of a house if he can bring together a buyer and seller and complete a home sale. A stock broker may earn a certain percentage of the transaction value of any stocks that he buys or sells on behalf of a customer. A commission is different than a fee or salary, in that a commission is specifically contingent on the conclusion of a sale. No matter how much work a broker puts into a trade or sale, if the deal does not get done, he typically does not get paid anything if he works on commission.
Brokers looking for more stable income can charge fees to certain clients, in addition to or in place of commissions. Brokers who earn fees are typically in the financial services industry. With a fee-based payment system, a broker earns a percentage of the value of client assets, regardless of the amount or frequency of any completed trades. For example, a broker who charges a fee of one percent of client assets will earn $1,000 per year on your $100,000 portfolio, even if no trades occur in your account.
Some brokers can earn a residual or "trailing" fee on transactions that have already occurred. For example, if a stock broker sells you a mutual fund, in addition to the upfront commission he may earn an annual residual fee, typically of a fraction of one percent. The U.S. Securities and Exchange Commission refers to these fees as 12b-1 fees.
Brokers in many industries are rewarded by upper management with bonuses for exceptional performance. Brokers can earn bonuses by doing a high volume of sales, by raising a large amount of client assets, or by completing any task deemed desirable by management.
- Dictionary.com: Commission
- U.S. Department of Labor Bureau of Labor Statistics: Securities, Commodities, and Financial Services Sales Agents
- Bloomberg Businessweek: Fee-Based Accounts -- A Poor Fit For Investors?; May 9, 2005
- U.S. Securities and Exchange Commission: Distribution (and/or Service) (12b-1) Fees
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