Commission

A commission is a payment made to a broker, agent or salesperson in exchange for arranging, facilitating or completing a transaction, typically calculated as a percentage of the deal's value rather than a flat fee set in advance. Commissions are one of the oldest forms of compensating financial intermediaries, found across stockbroking, insurance, real estate and mortgage lending, wherever a middle party helps connect a buyer and a seller or a borrower and a lender.

In investment markets, commissions were once charged on nearly every stock trade placed through a broker; the rise of discount and zero-commission online brokerages over the past two decades has pushed many retail trading commissions toward zero, shifting broker revenue instead toward other sources such as payment for order flow, margin lending interest, and account-level fees charged for premium services.

If a salesperson earns 2 percent of every deal they close, that 2 percent is their commission — the more they successfully sell, the more they personally take home. This structure aligns the agent's own financial incentive with closing transactions, for better or for worse, since a commission-paid agent is directly rewarded for transaction volume rather than necessarily for recommending whatever happens to be genuinely best for the client sitting across the table.

That misalignment risk is exactly why commission structures are closely watched by regulators in areas like insurance and investment advice, where a real conflict can arise between the product that earns the agent the highest commission and the product that actually serves the customer's own financial interests best.

Stockbrokers historically charged a commission on every single trade executed on a client's behalf; insurance agents earn a commission on the policies they sell, often expressed as a percentage of the policyholder's first year of premium payments; real estate and mortgage brokers earn commissions calculated on the value of the property or loan transaction they help close; and mutual funds sold with a sales load pay a commission directly to the broker who placed the client into that fund.

Fee-based financial advisers instead charge either a flat annual fee or a percentage of assets under management, regardless of how many individual transactions occur within the account, which proponents argue meaningfully reduces the incentive to churn an account or recommend unnecessary trades purely to generate additional commission income. Commission-based compensation nonetheless remains extremely common in insurance sales and in a significant share of brokerage relationships worldwide, and regulators in many countries now require commission amounts to be disclosed clearly so customers can actually see, in dollar or percentage terms, exactly how their adviser or agent is being paid.

Securities and insurance regulators have increasingly required commissions to be disclosed plainly and prominently to the customer before a sale is finalized, and fiduciary-duty rules adopted in several jurisdictions now limit an adviser's ability to recommend a particular product purely because it happens to pay a noticeably higher commission, rather than because it genuinely best suits that specific client's stated needs and circumstances.

Some product categories, particularly certain insurance and pension products in markets with stronger consumer-protection regimes, have seen regulators impose outright caps on the commission an intermediary may earn, or require a portion of any excess commission to be rebated back to the customer, specifically to blunt the incentive for an agent to steer a client toward the single highest-paying product available rather than the most suitable one.

Beyond the upfront commission paid at the point of sale, many financial products also pay a smaller recurring "trailing" commission to the intermediary for as long as the client keeps the product in force, which creates its own distinct incentive: the adviser benefits not just from closing the original sale but from the client remaining in that same product for years afterward, regardless of whether switching to a newer or cheaper alternative might genuinely serve the client's interests better.