Broker
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. In the past, only the wealthy could afford a broker and access the stock market. Online broking triggered an explosion of discount brokers, which allow investors to trade at a lower cost, but without personalized advice.
KEY TAKEAWAYS
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
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
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.
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