A trailing commission is a recurring fee paid to a financial advisor or broker for as long as a client remains invested in a particular fund or product. Unlike upfront commissions paid at the time of sale, trailing commissions provide ongoing compensation.
Trailing commissions are typically calculated as a percentage of the client's investment value. For example, a 0.5% annual trailing commission on a $100,000 mutual fund investment would pay the advisor $500 per year.
The purpose of trailing commissions is to incentivize advisors to maintain long-term relationships with clients and provide ongoing service. However, critics argue they can create conflicts of interest, as advisors might recommend products with higher trailing commissions over better-performing alternatives.