Commissions

Lesson

Commissions are a form of compensation for financial professionals who facilitate client transactions.

Practice Question #1

Which of the following is NOT a form of compensation for financial professionals?

A) Commissions

B) Management fees

C) Sales loads

D) Dividends

Select an option above to see an explanation here.

A) Commissions are fees brokers or agents charge for executing trades or providing investment advice. B) Investment advisers charge management fees for managing a client's portfolio. C) Sales loads are fees mutual funds charge for purchasing or selling shares. D) Dividends are payments made by corporations to their shareholders, not a form of compensation for financial professionals.

Terms

Commission:: A fee charged by a broker or agent for executing a trade or providing investment advice.
Broker:: An individual or firm facilitating transactions between buyers and sellers for a commission.
Agent:: A person representing a broker-dealer or issuer in effecting securities transactions.

Practice Question #2

What is the primary ethical concern surrounding commissions in the financial industry?

A) Conflicts of interest

B) Excessive fees

C) Market manipulation

D) Insider trading

Select an option above to see an explanation here.

A) Conflicts of interest may arise when financial professionals prioritize their compensation over the best interests of their clients. B) Excessive fees are a concern but not the primary ethical issue surrounding commissions. C) Market manipulation is an illegal practice unrelated to commissions. D) Insider trading is an illegal practice unrelated to commissions.

Do Not Confuse With

Markup:: An additional charge added to the cost of a security by a broker-dealer when selling to a client.

Practice Question #3

Which of the following practices is considered unethical and a violation of fiduciary duty?

A) Charging a commission for executing a trade

B) Recommending a suitable investment for a client

C) Disclosing potential conflicts of interest

D) Churning a client's account to generate commissions

Select an option above to see an explanation here.

A) Charging a commission for executing a trade is a standard practice in the financial industry. B) Recommending a suitable investment for a client is part of a financial professional's fiduciary duty. C) Disclosing potential conflicts of interest is an ethical practice and part of a financial professional's fiduciary duty. D) Churning a client's account to generate commissions is an unethical practice and a violation of fiduciary duty.

Historical Example

In the late 1990s, a major brokerage firm was accused of churning client accounts to generate excessive commissions. The firm settled the case for millions of dollars and implemented new policies to prevent such practices.