Whether you are a savvy commercial real estate investor or are just starting your commercial real estate investment journey, hiring a professional advisor to walk you through commercial real estate investing pays off.
The trade-off you make to avail such quality advice that will guide you throughout and steer your way in the commercial real estate investment sector is the charges you pay to these advisors.
How much do commercial real estate investment advisors charge? That’s an important question to ask and consider before choosing the right advisor who fits your needs and budgets.
This blog is an overview of the charges charged by commercial real estate investment advisors and how to get a good deal for all your investment advisory needs. Hang in there as we’ll explain all that you need to know about commercial real estate investment advisors’ costs or charges.
Two major types of Commercial real estate investment advisors’ charges
Investment advisors collect two major types of charges. The first one is the commission charges. The second is the Fees charges. There is a difference between the two, and while it’s not possible to tell with certainty which one’s the best one, one should look into the differences to understand what specifications suit their needs and budgets.
In some cases, going with an advisor who charges fixed fees for their services might be the best option. And in others, paying your advisor, a fixed percentage of a commission could work out better.
What is a commission?
The commission is service charges assessed by investment advisors or investment brokers to handle or supervise the purchases and sales of securities on behalf of the client or provide investment advice or consulting.
In most cases, the commission is based on the transaction value involved. It is mostly charged when an investment advisor sells securities, assets, or property or provides any advice or consulting that leads to the closing of the sale.
A commission can often also be called as brokerage, which would be charged by the investment advisor to both the parties – the one selling property and the one buying it. While considering your real estate investment expenses, commission or brokerage play a significant part and is a significant expense that needs to be accounted for.
What are the Fees charges?
Fee charges are charged that are imposed by investment advisors as flat fees for managing their client’s money or a portfolio, regardless of where or what investment products the client is investing in. These fees charges are generally fixed and mutually agreed-upon dollar amount or a percentage of the assets under management (AUM).
Due to the high volatility of different types of assets, most investment advisors who impose fees charges generally charge by taking into account the Assets Under Management over fixed flat fees. However, one can still find investment advisors providing their services at flat fees for managing client’s money or properties.
The most crucial distinction between the two types of investment advisors’ charges
Amongst other differences, the one most important distinction between commission-based advisors and fees based advisors is the very nature and scope of their work – Commission-based advisors charge commission or brokerage and make money by selling investment products like annuities or mutual funds.
On the other hand, a fee-based investment advisor charges a flat fee for managing their client’s money or assets. Although on the outlook, these two terms can be confused and used interchangeably, their meanings are different and the out-of-pocket expense associated with both types of investment advisors varies too.
If a commercial real estate investor is actively looking to sell off his investment holdings, finding an advisor who charges commission or brokerage might do the work for him very well instead of a fee-based investment advisor who might take a longer time to close the deal.
Similarly, when an investor is looking for someone who can take care of all his investment holdings, look out for their progress and get updates from all investment holdings, month on month, from time to time, searching for a fee-based advisor will be a better choice. Thus, depending on the nature of your commercial real estate investment needs, you should decide what kind of advisor you should be working with.
An Important thing to note for investors
When an investor is determining the total gains or losses incurred by selling a stock or other assets, one should duly consider, and factor in the amount of commission or brokerage paid to an investment advisor to determine the accurate gain or loss. Without considering a commission, one would arrive at misleading numbers, which might lead to poor investment decisions moving further on.
Besides, when you’re looking into buying a new line of investment assets, considering the cost of commissions or brokerages paid is very important while assessing your total costs and benefits. Besides, commercial real estate commission rates keep fluctuating and vary based on individual experience and expertise in the field too. Choosing someone who tailor fits your specific needs is the key to long term investing success.
Commissions versus Fees
Financial advisors or investment advisors majorly portray themselves as being fee-based and not commission or brokerage based. The reason behind this is simple. Investment advisors who are experts in providing real-time and valuable investment advice want to leverage from their immense industry experience, and it makes more sense for them to work with a bunch of clients with fixed fee rates, providing them valuable advice.
On the other hand, advisors who charge commissions generally work with a select set of clients, who keep changing and make money off the massive commissions they charge for closing deals or executing a final sale.
In general, commission-based commercial real estate investors generate more income by selling investment holdings that offer higher commissions. Another way of making more money as a commission-based commercial real estate advisor is to move around the client’s properties or investments and indulge in fix-and-flip property transaction types.
An ideal professional real estate investment advisor has a fiduciary responsibility of offering bits of advice and investments that are in the best interests of their clients. However, in a practical scenario, commission-based investment advisors can steer their clients towards purchasing assets or investments that offer generous commissions to them.
Therefore, it’s important to look into your specific unique needs before choosing your investment advisor. Here’s an example of a case scenario on how the commission can eat up an investor’s returns and why it’s so essential to consider this expense before choosing an advisor.
How do commissions work in a practical scenario?
Let’s assume Jacob buys 500 shares of XYZ Corp at $10 per share. His broker charges a 2.5% commission for carrying out this transaction. So, Jacob pays $5000 for stocks and an additional $125 as a brokerage to his agent.
One year later, Jacob sees that his shares have appreciated by 10%, and he sells them off at market value. His broker now charges a 2% commission on the sale. Thus, Jacob makes $5,500 on the sale, and he has to pay $110 to his broker as commission.
Therefore, Jacob’s investment earned him $500, but he paid $235 as brokerage fees. Thus, Jacob’s net gain from this transaction is $265. Most investors who do not take the commission or brokerage charges as a serious out-of-pocket expense might assume that the profit is $500, whereas, in reality, the actual net gain is only $265. This is a typical case scenario that explains how the commission can eat up an investor’s total returns.
Bottom line: Before you look at net gains from any commercial real estate transaction or any other investment holdings transaction, considering all the variables that factor in is very significant to understand the real benefits or gains of investing.
This is also one of the reasons why robo-advisors are gaining huge popularity nowadays. The websites specifically cater to self-directed investors by charging flat fees of around $4 to $5 for trades and generally provide all relevant trading and investment news and updates. However, what these platforms do not provide is personalized advice or human insights.
Thus, such platforms can rather be dangerous for investors who have limited knowledge and experience with commercial real estate investments and other types of investment holdings like annuities or mutual funds. However, if your knowledge is good enough, such platforms or Robo-advisors can successfully replace human investment advisors and save a lot of money you would otherwise end up paying as generous commissions or brokerages.