A broker who is based on effort is usually a professional who works on a time scale and has to provide a certain product which is mostly either difficult to get or a goal difficult to reach, or he works only on a facet of a transaction. Generally the client engaging under such terms and conditions either wants tight control and a fixation of interest of the broker towards him alone or the transaction is so big that sharing the profit with a success based brokerage commission is above his balanced willingness to share.

A success based renumeration gives the broker usually a higher payment than the effort based renumeration but includes the risk of failure. He is not paid by the client if the transaction does not happen, or depending on the job description, his effort was not successful.

There are for example success based brokerage job description which oly cover part of a transaction, lets say the broker is only engaged in bringing together a buyer and a seller of a certain product but the process of handling the result of the contract when performed are none of his business. Lets looks for an example in the financial world: Amaranth Advisors is looking for new investors, their office engages with brokers paying them 5% of the amount any investor is investing in the Hedge Fund. Investor X is looking for a good investment. His broker offers the Amaranth Advisors Funds and X signs on and funds the account. In such case the brokers have done what was necessary. Both principals got what they wanted, so the fee is due (if they are 2 seperate brokers they usually share). Now as anybody who reads the financial news, Amaranth Advisors lost from his 9.2 BUSD 6.5 BUSD, so it is down to 2.7 B USD and it is closing the fund down. So the investor has not gained anything but lost, but that does not affect the compensation rights of the brokers because they did not effect brokerage for the "success of the investment" but for "the investment".

(which does not mean there is no liability issue for non-disclosure of risk but thats a different topic)

Lets say the Investor X funded his hedge fund account with 10 Million, it would mean a renumeration amount of total 500000 USD. If said structure would be an "effort based" renumeration paid by the hour, it would probably somewhere between 3000 to 10000 USD.

The reason why brokers engage in an effort based brokerage is that it covers the overhead costs nicely and like they say: The sparrow in your hand is better than the dove on the roof.

However and as always both brokerage renumerations need clear language and undestanding in the basic contracts. A success based broker can not easily charge an advance fee. he can only do so when the contract allow it and even then only for expenses which are not-brokerage based and instructed by the client.

Brokerage based cost and expenses are for example the brokers living expenses, his car, his office etc. Every expense which is based on the effort made to succeed with the intended success of the brokerage. If however the client wants his brochure high gloss instead of the usual simple design than he gets involved himself and gives instructions which usually demand more expenses and therefore if contractually regulated, have to be compensated on a cost basis. Another example is when the client wants an accounting and legal advise by a specific accountant and lawyer, the expenses which are higher than the usual can be contracted as expenses to be paid by the client.

It needs to be understood that any failure to regulate this clearly and any failure in audit and capture of such expenses will usually result in a waiver from the court and the broker will not see any funds for these but can incure civil and criminal problems when he received up front fees. In such a case the renumeration is only based on the success.

Any mixture of both renumeration systems is legaly possible but needs to be stated clearly and signed twice as a seperate part of the agreement, no small print is possible.

In brokerage the judges always revert back to the success based renumeration if the renumeration provisions in the agreement are not clear and identified in detail.

Some countries (civil law countries) have specific laws about this, other countries, more influenced by the english legal system, revert to case law and long standing practise. The results are often the same, but not always.

I've had to rescue associates in front of a court when things went wrong in the transaction and the client had second thoughts. In such a case things are usually along to far and the damage to the relation already done it is difficult to safe anything anyway. The usual cases are a broker who is low on funds and seeks to get some advanced funds in order to start the process and survive the time necessary till the transaction is successfully concluded. Such is illegal if the client is not advised about it and even if such funds have to be reimbursed if the transaction goes awry. There are such cases where the broker is no broker but only shows himself as such and uses criminal fraud to get the advance fee into his hands, unfortunately often but avoidable. There are such cases where brokers take on a whole project, such as raising money, funding the project, handling the sinking fund, disbursing etc and then they no not keep the parts which are effort based seperate from the parts which are success based and when things go the wrong way, that broker is the one which gets the high bill presented for payment. The above are jus cases and there is all kind of different cases available and the handling is difficult and soemtimes very different.

The broker is usually lost in a legal debacle when his contract is not clar and detailed. However the best path is honesty with the client before the contract, then an exchange of different views etc and thena contract. The courts look at things different when a contract is actually discussed and point by point negotiated and argued and frowns on legal problems with contracts which are just presented from one side.

I can from my experience tell that we never allow a file to mix both renumeration systems in one contract, never allow the same parties in different contracts mixing the issue on a larger project, and terminate brokers actively seeking advance fee income from a client on a success based brokerage contract.

So far associates which needed defense on renumeration issues have been few and the ones working outside our internal guidelines received the assistance but where on "probabtion" for at least 3 years.