In the world of stock trading, the investor that pursues the right course of action for their particular portfolio may not always win, but at least they start the race with both shoes tied. Understanding how both fee based and commission based brokerage advisory services work can have a significant effect on a portfolio's returns, both immediate and extended, and should be the first thing a well informed investor researches.

Payment and Work Provided

To understand the fundamental difference between a fee based and commission based brokerage advisory service, you must first realize how many advisory personnel function. Almost every professional adviser is tied to a large scale brokerage firm, a Goldman Sachs or Merill Lynch, who grants the adviser little in the way of actual work, but instead provides that adviser with the ability to use their name and likeness to attract clients based on the reputation of the firm as professional and capable. In turn, the adviser will provide the firm with a percentage of total commissions. This allows one to understand that advisers employed by means of a commission based service, where each buy/trade/sell of a chosen stock results in a payment for both the adviser and the firm they represent, are under pressure from their own bottom line and that of their parent firm to produce trades. It can then become quite obvious why artificial manipulation of trades would be in the favor of a commission based broker.

To contrast, fee based financial advisers are paid by the hour, which generally allows them more leeway to avoid practices that result in artificially inflated commissions, and results in less fiduciary responsibility to their parent company to provide commission percentages. This is not to imply that brokers who agree to fee based advisement do not receive trade based commissions, but the need to base their livelihood on inflating trades is greatly diminished, and often results in a significantly higher quality of work per dollar spent.

Size of Portfolio Matters

When you are a small scale investor-usually less than $10,000-it is often a good idea to pursue a commission based analyst, as the small amount of trades will benefit you in a cost comparison. When weighing in at the other end of the spectrum, however, a significant investment can quickly become a costly endeavor when commission based fees are chosen as the method of brokerage payment, and especially when said investment is long term and leeway for constant trading is given to your broker.

Consider a $50,000 investment made with conditions for no further trading, and a commission based service chosen. With a 5% load fee associated with it, the cost paid translates into $2,500, which could pay any analyst for a significant amount of time, time that should lead to a diverse, resilient portfolio.

Making the Decision

Ultimately the choice to pursue either a fee based or commission based brokerage service falls on the perceived capability of the broker to deliver adequate service based on the prices quoted. This, unfortunately, is weighted strongly by the broker's parent firm, and it should be noted that pursuing an independent financial adviser, such as a san francisco independent advisor, may be in your best interest, as lacking a parent company often translates into an increase in work ethic from your certified financial planner.