Trailing commissions are a type of commission that is paid to a broker or advisor.
Usually brokers/advisors are paid an upfront fee when they act on behalf of a client, but they are also often paid trailing commissions which are ongoing or consecutive payments.
For example:
If a broker finds you a product to invest in, they will typically charge a brokerage fee to you as the client for facilitating your purchase of the investment.
Depending on the product you invest in, and the regulations in that country, the broker will also gain a fee (normally called a distribution fee) for selling the product to you, the investor.
Brokers typically get paid an upfront fee, meaning a fee as soon as the product has been purchased by you, the investor, and then a trailing commission, which is an ongoing fee they are paid for the duration of your investment.
Some parts of the world have banned these types of commissions as they incentivise mis-selling, meaning they incentivise brokers to ensure you keep your investment in this product so they continue to get paid their trailing commission and it incentivises them to offer you products that may pay a higher fee to them.
Distribution fees, like the ones in the example above, are banned under the recent changes last year to the Markets in Financial Instruments Directive, more commonly known as the MiFID II, regulations in Europe.
For now, these types of distribution fees are still allowed in Australia.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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