What Is a Brokerage Fee?

A brokerage fee is an amount of money charged to the client of a broker or brokerage house and represents compensation for the broker's services as an advisor or intermediary in the purchase or sale or financial assets. Brokerage fees may be structured in a variable manner based on volume or as a fixed amount for a limited number of orders.

Brokerage

• Brokerage is the practice of facilitating the purchase or sale of market assets for the benefit of a paying client. Individuals who engage in this practice are licensed professionals called brokers. A broker may practice in a self-employed agency capacity or as an employee of a company or brokerage house.

Assets

• Brokers aid in transactions involving assets whose values are subject to fluctuation in a market setting. Such transactions are generally in the thousands and sometimes millions of dollars and include such items as stocks and bonds, residential and commercial real estate, and all manner of insurance.

Structure

• Brokerage fees may be charged in one of three ways. A broker may charge clients a specific fee for each transaction executed, such as a single amount or a percentage of the transaction's value. For a large volume of small individual transactions, a broker may charge a fixed amount up to a specific number of transactions. In a situation wherein the broker also serves in an advisory capacity, e.g., a financial adviser, a combination of fixed and variable fees may be applied. For instance, a broker may charge a fixed fee for financial advice accompanied by a percentage of the total value of financial securities bought or sold.

Ethical Considerations

• The role of a broker is to aid in both the sale and purchase of assets. The nature of brokerage fees makes it relatively easy for a broker to potentially increase his or her income by persuading clients to buy or sell beyond their initial request. This is particularly an issue where financial advisers are concerned. Brokers must be sure to place the needs of their clients before their own as a matter of professional integrity.

Client Implications

• Individuals who solicit the services of a broker for financial securities, insurance, or real estate must be aware of how their broker's fees are structured as it affects the value they receive on sales as well as the price they pay on purchases. Some brokers include (roll) the brokerage fee into the asset prices, while others itemize these fees separately. In either case, clients need to be aware of how much they can afford to pay in such fees given the asset(s) they wish to purchase. Likewise, they should be aware of how much value they may lose to such fees when selling an asset.