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A trail commission is a type of commission that continues to be extended to advisers or others long after an investment is purchased. Typically structured as a small percentage of the per annum associated with the investment, this type of commission is often assessed by discount brokers in both online and offline environments. When this is the case, the commission is assessed until the investor chooses to sell the asset.
While the actual amount of a trail commission is very small, this type of assessment can be quite lucrative for an adviser or broker with a large number of clients who purchase high volume investments. Assuming that those investors hold onto those assets for at least three to five years, the adviser can create a steady revenue stream that helps to support the brokerage while actively seeking new clients. In recent years, the importance of the trail commission has increased, as more and more brokers charge small smaller up-front commissions at the time a transaction is brokered.
One aspect of the trail commission approach that many investors find appealing is that brokers have a vested interest in urging clients to hang onto holdings for longer periods of time. This is especially true when the current practice involves low initial commissions, since the longer that the asset is held, the more that the broker ultimately realizes for his or her efforts. Brokers are less likely to push clients to buy and sell assets rapidly in order to make short-term gains, a situation that allows clients to identify investments that are anticipated to generate equitable returns over a number of years, acquire those securities, and then allow them to remain an integral part of the investment portfolio.
As with all types of fees and commissions, investors will seek to identify advisers and brokers who charge the most attractive initial commissions as well as the lowest amount of trail commission. Depending on the goals of the investor, going with a higher percentage on the trail commission in order to obtain a significant reduction in the initial commission may be a good approach. In some cases, investors may be willing to pay a larger commission on the front end in exchange for a lower trail commission, especially if the goal is to hold onto the acquired security for five years or more. Doing so means that less of the returns generated by the asset from year to year are forwarded to the broker as part of the ongoing commission structure, allowing the investor to make use of those funds for other purposes.
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