How are trailing commissions calculated?

Trailing commissions are typically calculated as a percentage of the investment's market value. This structure allows financial advisors or firms to receive ongoing compensation for managing or providing service to a client's investments over time.

As the market value of the investment fluctuates, the amount received in trailing commissions also varies. This percentage-based approach aligns the interests of the advisor with the client's investment performance, as higher investment values result in higher commissions. The ongoing nature of the commission compensates the advisor not just for the initial sale, but for ongoing maintenance and support of the investment.

In contrast, a flat fee per transaction or a fixed dollar amount per year would not account for the changes in investment value and would lack the ongoing incentive structure designed to ensure that advisors remain engaged with their clients' investments in the long term. Meanwhile, calculating commissions based on a percentage of the investor's profit would complicate the payment structure and could lead to conflicts, as it may encourage advisors to focus on short-term gains rather than long-term strategy and stability.