Kommission

What Is Kommission?

Kommission, often translated as "commission," refers to a fee charged by a financial intermediary, such as a broker or agent, for executing a transaction or providing a service. These charges are a fundamental part of brokerage and trading costs within the financial industry. Commissions typically represent compensation for facilitating the buying and selling of financial instruments like equity, bonds, mutual funds, or exchange-traded funds. Unlike certain fixed fees, a kommission is often tied directly to the volume, value, or number of transactions undertaken. Understanding kommission is crucial for investors as it directly impacts the net return on their investing activities.

History and Origin

For much of its history, the pricing of brokerage services in the stock market was far from competitive. In the United States, a significant turning point occurred on May 1, 1975, a date widely known as "May Day" in the financial world. Prior to this, the New York Stock Exchange (NYSE) enforced fixed commission rates, meaning all member brokers charged the same fee for a given transaction, irrespective of the service level or order size⁷, ⁸. This practice, which had been in place for over 180 years, effectively stifled price competition among brokers.

However, increasing pressure from the U.S. Justice Department and the Securities and Exchange Commission (SEC) eventually led to the abolition of these fixed rates. On January 23, 1975, the SEC formally adopted Rule 19b-3, which mandated the end of all fixed commission rates charged to non-member investors, effective May 1, 1975⁵, ⁶. This deregulation sparked a revolution in the brokerage industry, leading to the rise of discount brokerages and significantly lowering transaction costs for investors. The shift initiated a long-term trend of commission compression, culminating in the widespread adoption of zero-commission trading by major brokerages in late 2019⁴.

Key Takeaways

Kommission is a fee charged by financial intermediaries for facilitating transactions or providing services.
It directly impacts an investor's net returns and overall portfolio performance.
Historically, commissions were fixed, but deregulation in 1975 led to negotiated and eventually zero-commission trading for many retail transactions.
While explicit commissions have decreased, brokers may still generate revenue through other means, such as payment for order flow or interest on cash balances.
Understanding all associated costs, beyond just the quoted kommission, is vital for informed investment decisions.

Interpreting the Kommission

Understanding how kommission is charged and its implications is vital for investors. Historically, kommission rates varied based on the type of security, the size of the order, and the services provided by the broker (e.g., research, advice). For instance, a "full-service" broker typically charged higher commissions, bundling them with personalized investment advice, whereas a "discount" broker focused solely on trade execution at a lower kommission rate.

Today, while many online brokers advertise "zero kommission" for stock and exchange-traded funds trading, it's important to recognize that costs still exist, albeit in less direct forms. These can include payment for order flow, where brokers route client orders to market makers who pay for the privilege, or revenue generated from interest on uninvested cash balances in brokerage accounts. Therefore, interpreting kommission involves looking beyond the headline figure and considering all potential costs that can affect an investor's overall return. Investors should scrutinize account statements and disclosures to fully grasp the total cost structure.

Hypothetical Example

Consider an investor, Sarah, who wishes to purchase 100 shares of Company X stock, currently trading at $50 per share.

Scenario 1: Traditional Commission Broker
Sarah uses a traditional brokerage that charges a fixed kommission of $7 per trade, regardless of the number of shares.

Cost of shares: 100 shares * $50/share = $5,000
Kommission: $7
Total cost of investment: $5,000 + $7 = $5,007

Scenario 2: Percentage-Based Commission Broker
Sarah uses a broker that charges a 0.15% kommission on the total value of the trade.

Cost of shares: 100 shares * $50/share = $5,000
Kommission: 0.15% * $5,000 = $7.50
Total cost of investment: $5,000 + $7.50 = $5,007.50

Scenario 3: Zero-Kommission Broker
Sarah uses a modern online broker advertising "zero kommission" trading for stocks.

Cost of shares: 100 shares * $50/share = $5,000
Kommission: $0
Total cost of investment: $5,000

In Scenario 3, while the explicit kommission is zero, the broker might still earn revenue through payment for order flow or other means. Sarah's actual execution quality or the spread she pays could implicitly factor in some form of cost.

Practical Applications

Kommission appears in various aspects of the financial markets and personal finance:

Stock and ETF Trading: Historically, this was the most common area for kommission charges. While many retail trades are now commission-free, some complex orders or certain less liquid securities may still incur a kommission.
Mutual Funds: Many mutual funds, especially those sold through intermediaries, may charge sales loads, which are a form of kommission. These can be "front-end loads" (paid when buying) or "back-end loads" (paid when selling).
Options and Futures Trading: These derivatives often involve per-contract kommission fees. Given the higher trading volume associated with these instruments, even small per-contract commissions can add up.
Financial Advisory Services: Some financial advisors operate on a commission-based model, earning a kommission when clients buy specific investment products. This differs from fee-based advice, where advisors charge a percentage of assets under management or an hourly rate.
Real Estate: Real estate agents earn a kommission, typically a percentage of the property's sale price, for facilitating the sale or purchase of property.

The Securities and Exchange Commission (SEC) emphasizes that fees, including commissions, can have a significant impact on an investment portfolio over time. Even seemingly small ongoing fees can substantially reduce portfolio value over 20 years, underscoring the importance for investors to understand all charges associated with their investments³.

Limitations and Criticisms

Despite the widespread shift to lower or zero commissions, the concept of kommission, and its broader implications, still faces scrutiny.

One criticism, particularly prevalent in the era of fixed commissions, was the potential for conflicts of interest. Brokers earning higher commissions for certain products might have an incentive to recommend those products, even if they were not necessarily the best fit for the client². While regulations aim to mitigate such conflicts, the underlying pressure to generate revenue remains.

Another limitation arises with the advent of "zero-kommission" trading. While attractive on the surface, these models often rely on other revenue streams, such as payment for order flow. Critics argue that this opaque practice may lead to retail investor orders being routed to market makers who offer the broker the highest rebate, rather than necessarily securing the best possible price for the investor. This could result in slightly worse execution prices, subtly increasing the true cost of investing for the client. Academic research has explored how brokers' incentives to generate trading commissions can affect various market aspects, including analyst forecast bias¹.

Furthermore, for institutional investors, where transactions are large and complex, the notion of kommission extends beyond mere execution. Institutional brokers often bundle additional services like research and market access into their commission structures, leading to ongoing debates about the true value and transparency of these "soft dollar" arrangements.

Kommission vs. Gebühr

While both "Kommission" (commission) and "Gebühr" (fee) represent costs incurred in financial transactions or services, they differ in their nature and application.

Kommission:

Nature: Typically a percentage or flat amount charged by an intermediary for facilitating a transaction.
Dependency: Directly tied to a specific trade or action (e.g., buying or selling shares).
Purpose: Compensation for the execution of a brokerage service.
Examples: A percentage of the trade value for buying stocks, a per-contract charge for options.

Gebühr (Fee):

Nature: A broader term encompassing various charges for services, maintenance, or privileges.
Dependency: Can be recurring (e.g., annual account fee), fixed for a service (e.g., wire transfer fee), or based on asset value (e.g., advisory fee).
Purpose: Payment for a service provided, account maintenance, access to a platform, or administrative tasks.
Examples: Annual account maintenance fees, advisory fees based on assets under management, inactivity fees, or fund expense ratios.

The key distinction lies in the direct link to a transactional event. A kommission is almost always transactional, whereas a Gebühr can be transactional but often refers to non-transactional or recurring charges. In practice, the lines can sometimes blur, especially with bundled services, but understanding this fundamental difference is important for evaluating the total cost of ownership for investments.

FAQs

How does kommission affect my investment returns?

Kommission directly reduces your net investment returns. If you pay a kommission when you buy and again when you sell, it eats into your profits. Over time, even small commissions can significantly erode your overall portfolio performance, especially for frequent traders or small investment amounts.

Are all brokerage fees considered kommission?

No. While kommission is a type of fee, not all fees are commissions. Commissions are typically tied to executing trades. Other fees might include annual account maintenance fees, transfer fees, or advisory fees, which are often grouped under the broader term "Gebühr."

Why do some brokers still charge kommission while others are "zero-kommission"?

The shift to "zero-kommission" for many common investments, like stocks and exchange-traded funds, has been driven by increased competition and technological advancements. Brokers offering "zero kommission" usually generate revenue through other means, such as payment for order flow, lending out shares for short selling, or interest on uninvested cash. Some specialized or full-service brokers may still charge commissions for the added value of research, advice, or access to less liquid markets.

What should I look for besides kommission when choosing a broker?

Beyond explicit kommission, consider other fees (account maintenance, inactivity, transfer), the quality of trade execution quality, the range of investment products offered, research tools, customer service, and the overall platform's user-friendliness. The lowest kommission doesn't always equate to the lowest overall cost or the best fit for your trading strategies.

Do financial advisors charge kommission?

Some financial advisors operate on a commission-based model, earning money when they sell specific investment products (like certain mutual funds or annuities) to their clients. Others operate on a fee-based advice model, charging a percentage of assets under management, an hourly rate, or a flat fee, which aims to reduce conflicts of interest related to product sales.