What is a Broker?

A broker is an individual or firm that acts as an intermediary between an investor and a securities
exchange. Because securities exchanges only accept orders from individuals or firms who are members
of that exchange, individual traders and investors need the services of exchange members. Brokers
provide that service and are compensated in various ways, either through commissions, fees or through
being paid by the exchange itself.

Broker Basics
As well as executing client orders, brokers may provide investors with research, investment plans and
market intelligence. They may also cross-sell other financial products and services their brokerage firm
offers, such as access to a private client offering that provides tailored solutions to high net worth clients.

 A broker is an individual or firm that acts as an intermediary between an investor and a securities
exchange.
 A broker can also refer to the role of a firm when it acts as an agent for a customer and charges
the customer a commission for its services.

 Discount brokers execute trades on behalf of a client, but typically don’t provide investment
advice.

 Full-service brokers provide execution services as well as tailored investment advice and
solutions.

 Brokers register with FINRA, while investment advisers register through the SEC as RIAs.

Discount vs. Full-Service Brokers

Discount brokers can execute many types of trades on behalf of a client, for which they charge a
reduced commission in the range of $5 to $15 per trade. Their low fee structure is based on volume and
lower costs. They don’t offer investment advice and brokers usually receive a salary rather than
commission. Most discount brokers offer an online trading platform which attracts a growing number of
self-directed investors.

Full-service brokers offer a variety of services, including market research, investment advice,

and retirement planning, on top of a full range of investment products. For that, investors can expect to
pay higher commissions for their trades. Brokers receive compensation from the brokerage firm based on
their trading volume as well as for the sale of investment products. An increasing number of brokers
offer fee-based investment products, such as managed investment accounts.

Real Estate Brokers

In the real estate industry, a broker is a licensed real estate professional who typically represents the
seller of a property. A broker's duties when working for a seller may include:

 Determining the market values of properties.

 Listing and advertising the property for sale.

 Showing the property to prospective buyers.

 Advising clients about offers, provisions, and related matters.

 Submitting all offers to the seller for consideration.

It is not uncommon to have a real estate broker work for a buyer, in which case, the broker is responsible
for:

 Locating all properties in the buyer's desired area sorted by price range and criteria.
  Preparing an initial offer and purchase agreement for a buyer who decides to make an offer for a
property.

 Negotiating with the seller on behalf of the buyer.

 Managing inspections on the property and negotiating repairs.

 Assisting the buyer through to closing and taking possession of the property.

Broker Regulation
Brokers register with the Financial Industry Regulatory Authority (FINRA), the broker-dealers’ self-
regulatory body. In serving their clients, brokers are held to a standard of conduct based on the “suitability
rule,” which requires there be reasonable grounds for recommending a specific product or investment.

The second part of the rule, commonly referred to as “know your customer,” or KYC, addresses the steps
a broker must use to identify their client and their savings goals, which helps them establish the
reasonable grounds of the recommendation. The broker must make a reasonable effort to obtain
information on the customer's financial status, tax status, investment objectives and other information
used in making a recommendation.

This standard of conduct differs significantly from the standard applied to financial advisors registered
with the Securities and Exchange Commission (SEC) as Registered Investment Advisers (RIAs). Under
the Investment Advisers Act of 1940, RIAs are held to a strict fiduciary standard to always act in the best
interest of the client, while providing full disclosure of their fees.

Real World Example of Brokers

There are many companies registered as brokers with FINRA, though some may use their broker
designation for different purposes than others. Many proprietary trading firms are registered as brokers so
that they and their traders can access exchanges directly, however they do not offer broker services to
customers at large. This differs from the role full-service or discount brokers might provide.

Full service brokers tend to use their role as a brokerage as an ancillary service available to high-net
worth clients along with many other services such as retirement planning or asset management.
Examples of a full service broker might include offerings from a company such as Morgan Stanley or
Goldman Sachs or even Bank of America Merrill Lynch. Such companies may also use their broker
services on behalf of themselves or corporate clients to make large block equity trades.

Other full service brokers may offer specialized services including trading execution and research. Firms
such as Cantor Fitzgerald, Piper Jaffray, Oppenheimer and others. There are many such firms though
their ranks have been decreasing because of mergers or from the higher cost of compliance with
regulations such as the Dodd Frank act.

Still other full service brokers offer personalized consultations and communications with clients to help
manage wealth and plan for retirements. These firms include companies like Raymond James, Edward
Jones or LPL Financial.

The larger brokerage firms tend to carry an inventory of shares available to their customers for sale. They
do this to help reduce costs from exchange fees, but also because it allows them to offer rapid access to
popularly held stocks. Other full service broker firms are actually agency brokers. This means that unlike
many larger brokers they carry no inventory of shares, but act as agents for their clients to get the best
trade executions.

Proprietary trading firms registered as brokers may not advertise their services as brokers, but use their
broker status in a way that is integral to their business. While larger banks or firms may have proprietary
trading desks within their company, a dedicated proprietary trading firm tends to be a comparatively
smaller company. Examples of standalone proprietary trading companies include SMB Captial, Jane
Street Trading, and First New York.

For many investors, the financial services industry is a strange and mysterious place filled with a
language all on its own. Terms like alpha, beta, and Sharpe ratio don’t exactly roll off the tongue, nor does
their use by industry insiders serve to lift the veil and make things less opaque. Of course, the language
fits the medium, as the financial services arena is a complex world. To participate in that world, investors
generally engage the services of a broker or dealer in some form or fashion, making a review of those
terms an interesting place to begin exploring. Let's dive into the difference between brokers and dealers.

KEY TAKEAWAYS
 A broker executes orders on behalf of clients and can be either a full-service broker or a discount
broker that only executes trades.
 Meanwhile, a dealer facilitates trades on behalf of itself. Some dealers, also called primary
dealers, also facilitate trades on behalf of the U.S. Federal Reserve to help implement monetary
policy.

 Broker-dealers are those that perform both responsibilities, such as traditional Wall Street
organizations, as well as large commercial banks among others.

Brokers
Broker and dealer are U.S. regulatory terms and, as is often the case with legal terms, they are not very
intuitive to many people. While the words are often seen together, they actually represent two different
entities. A broker executes orders on behalf of clients. To the regulators, this means the entity through
which investors hold a brokerage account. To investors, it generally means the person who helps them
buy and sell securities. A bit of confusion occurs here, as the industry also has lots of terms for a person
who helps investors buy and sell securities, including financial advisor, investment advisor, and registered
representative. For the moment, we’ll stick with the strict legal definitions to provide a baseline for further
exploration.

Think of the legal entity that facilitates security trading as an agent acting on behalf of investors. When
you want to buy or sell a security, the entity (in the case of online brokerage accounts for example) that
helps you make that transaction is your agent. When you pay a commission to make a trade, you are
making that payment to an agent. The terms agent and broker can be used interchangeably.

Full-Service vs. Discount Brokers

Brokers come in two general types: full service and discount. Full-service brokers provide one-on-one
personal service. This includes providing specific investment recommendations in addition to planning
and advice services that range from retirement planning, long-term care planning, and estate planning to
the formulation of a personal investment strategy that will help cover the cost of a child’s education, a
home purchase, or other financial goals. Ongoing assistance can include face-to-face meetings and
periodic checkups to revisit progress toward goals. For novice investors or those too busy to plan for
themselves, full-service brokers offer an array of useful services and information.

Discount brokers, on the other hand, provide trade execution. Online brokers are perhaps the best
example of this arrangement, as investors can log on, select a security, and purchase it without ever
speaking to another person. Discount brokers offer an inexpensive way to purchase securities for
investors who know exactly what they what to buy. Some of these firms also offer online tools and
research designed to help do-it-yourself investors generate ideas and research securities they may be
interested in purchasing. The limited service offering provided by discount brokers is significantly less
expensive than the cost of working with a full-service broker. Still, it's wise to clarify any misconceptions
about discount brokers before hiring one.

Dealers
While a broker facilitates security trades on behalf of investors, a dealer facilitates trades on behalf of
itself. The terms “principal” and “dealer” can be used interchangeably. So, when you hear about big
financial firms trading in their house accounts, they are acting as dealers.

Some of these dealers, known as primary dealers, also work closely with the U.S. Federal Reserve to
help implement monetary policy. Primary dealers are obligated to participate in the auction of debt issued
by the U.S. government. By bidding on Treasury bonds and other securities, these dealers facilitate
trading by creating and maintaining liquid markets. They assist in the smooth functioning of domestic
securities markets as well as transactions with foreign buyers.

Dealers also play a self-governing role, to ensure the correct functioning of securities markets. They are
regulated by the Financial Industry Regulatory Authority (FINRA), which is responsible for administering
exams for investment professionals. Some of the better-known exams include the Series 7, the Series 6,
and Series 63. The Series 7 permits financial services professionals to sell securities products, with the
exception of commodities and futures. The primary focus of the Series 7 exam is on investment risk, tax
implications, equity and fixed-income securities, mutual funds, options, retirement plans, and working with
investors to oversee their assets. The Series 6 designation enables investment professionals to sell
mutual funds, variable annuities, and insurance products. And the Series 63 enables them to sell any type
of securities in a specific state. Obtaining these licenses is the first step financial services professionals
need to take to get into the securities business.

Putting It All Together

Most firms investors would act as both brokers and dealers and are therefore referred to as broker-
dealers by industry regulators. These firms include the primary dealers and other traditional Wall Street
organizations, as well as large commercial banks, investment banks, and even small independent
boutique firms that cater to the wealthy.

Broker-dealers play an important role in the financial markets, as these firms provide the infrastructure
that facilitates stock trading. In fact, if you want to buy stock, you must open a brokerage account through
a brokerage firm. The brokerage firm makes sure you have enough money in your account to conduct a
trade, facilitates the trade by interacting with the stock exchange where the stock is traded, provides the
computer systems that enact the trade, and keep records of the trade. It also handles the financial
transaction between the buyer and the seller and facilitates future transactions (dividends, stock splits,
corporate actions such as those that occur when preferred securities are called or stock splits take place).

The Bottom Line

With the depth and complexity of industry offerings and the ever-changing nature of the industry itself,
knowledge is power. While there are pros and cons of partnering with a broker-dealer , the greater your
grasp of the industry’s vocabulary, the better your starting point for understanding how the industry
functions. This includes developing a better sense of how your investments work, the services you get in
exchange for the fees that you pay, who or what provides those services, and what you can expect
should a dispute end up in court.

 Real estate agents are licensed sales people who help clients buy and sell homes or other
properties. Their duties include listing and marketing the properties, and guiding the parties
through the sale. Although they are often considered independent contractors, agents must work
under the management of a broker.
 Real estate brokers are owners or managers of real estate agencies. They run the office and
work with the title companies and real estate lawyers who process real estate transactions. They
 can provide the same buying and selling services to the consumer as a real estate agent. Some
brokers choose to work alone in their own offices while others have agents working for them.

 Realtors are real estate agents or brokers who are members of the National Association of
Realtors, or NAR. As members of the trade group, they agree to follow its code of ethics. But that
doesn’t mean brokers and agents working outside of the NAR are unethical; every licensed agent
and broker must adhere to state standards.

 Broker associates, sometimes called associate brokers, are licensed real estate brokers who
often work as agents but also have the ability to broker their own transactions so that they may
receive a greater commission.