When some people first enter the financial industry, they instinctively recognize that they were born to be salespeople. To that end, they are certain that they want to parlay their interpersonal and salesmanship skills into either becoming a stock broker/advisor, or an insurance representative. But which option is more lucrative and rewarding? In this article, we'll delve into the pros and cons of each position. (To read more about choosing a career, see Preparing For A Career As A Broker Or Trader.)
The Advantages of Being a Broker/Advisor
Who can resist prestige, potentially lofty commissions, flexible hours and the lifestyle that goes along with a high income? Unfortunately, these rewards don't come easy, or without a price.
- Prestige: For the most part, being a stockbroker or an advisor is considered to be a very prestigious job and that is because in order to become a broker or an advisor one must pass several rigorous exams (including the Series 7 and Series 63). In addition, a great deal of prestige emanates from the enormous responsibilities that go along with the job - more specifically, the work that brokers and advisors take on as they analyze and monitor their clients' holdings. (To read more about these exams, see Tips For Series 7 Options Questions and Succeeding At The Series 63 Exam.)
- Lofty Commissions/Good Lifestyle: Depending on the firm, many high performing brokers and advisors can sometimes receive anywhere from a 30-50% share of total commissions on transactions they generate over a year. By extension, this type of payout permits financial sales professionals to enjoy a relatively high standard of living.
How high? According to Salary.Com, the median base salary of a broker in the United States is $51,478 per annum. To provide some perspective, this number compares quite favorably to the median wage earned in the United States, which according to the Bureau of Labor and Statistics was $33,634 (in June of 2006).
Also, keep in mind that the figure quoted above ($51,478) includes brokers that are relatively new to the industry. After several years, it is not uncommon for stockbrokers to earn between $100,000 and $175,000 per year, depending on where they live. (Generally brokers and advisors based in financial centers such as New York tend to fare better than those living elsewhere.)
- Live Off Your Book: It may take many years for a broker or an advisor to build up a substantial client base and to have a large sum of money under management. However, once a broker has built up a formidable base of business, he or she may be able to live off of the commissions that are generated, simply from servicing existing client accounts.
It is not uncommon for an active broker (whose firm makes markets in the stocks in which he or she trades) to earn 3-5% of the total amount of money under management in take-home pay.
- Flexible Hours: While it is not uncommon for some brokers to work 12- and 14-hour days, particularly when cold calling and building a book of business, the fact is that a broker's day remains relatively flexible. That is, once the market closes at 4pm Eastern Standard Time, he or she generally has the option to go home for the day. Additionally, it's not uncommon for brokers to be in and out of the office for both personal and professional reasons throughout the day. In short, this is an attractive perk of the business, particularly for those who don't want to work a more typical nine-to-five job. (To learn more about cold calling, see Alternatives To The Cold Call and Cold Call Without Getting The Cold Shoulder.)
By the same token, some brokers will work on Saturdays and try to get caught up on paperwork and other clerical duties that fell to the wayside during the workweek. While not usually mandatory, Saturday hours can be burdensome to those with other responsibilities on the weekends.
- Diversity of Products: Licensed brokers and advisors often sell a myriad of products ranging from stocks, bonds, convertible debt and options, to wrap accounts and futures contracts. This diverse product line enables them to sell their wares to people of all age groups and socioeconomic statuses. It also allows them to theoretically meet the varying needs of both conservative and risk-averse clients.
The Disadvantages of Being a Broker
The price of achieving all of the benefits of being a broker range from troubles at even getting started to the high pressure to perform. If you can get past these hurdles, you are well on your way to a lucrative broker career.
- Trouble Getting Started: It is difficult to get started in the brokerage business. In addition to having to pass the aforementioned exams, brokers these days are limited by strict rules and regulations regarding prospecting.
For example, according to Securities and Exchange Commission (SEC) rules, cold calls to prospective clients may only be made between the hours of 8:am and 9pm in the prospective client's time zone. (And while these hours may sound reasonable, it does put a limit on the total number of prospects that the broker may contact within a given day. It also places limits on brokers that work in one time zone and prospect in another).
In addition, over the last several years, the Federal Trade Commission (FTC) adopted a nationwide do-not-call list, which means that if an individual has registered with the FTC, a broker may not call upon that person. If he or she does, the penalties can be stiff - up to $11,000 per incident. In short, these new rules have dramatically lowered the number of reachable potential prospects, and limited the use of cold calling as a means for building a base of business.
- Pressure to Perform: While nationwide statistics indicate that physicians, police officers and government workers tend to experience the highest rates of suicide (due to the demands of their jobs), stockbrokers and financial advisors are also under an enormous amount of pressure to perform. In fact, stress is a major reason why many brokers tend to burn out of the profession within their first few years of employment.
- The Liability Factor: According to the Financial Industry Regulatory Authority (FINRA), more than 5,600 investor complaints were received in 2006. As a result of those complaints, 394 individuals were barred from the industry, and 352 individuals were suspended. The truth is, brokers and advisors have become increasingly susceptible to lawsuits (or arbitration) over the past several years. Due to the increasing prevalence of securities attorneys throughout the nation, the number of arbitration cases and suits is expected to only increase from here. (To learn more about liability, see When A Dispute With Your Broker Calls For Arbitration, Deal Effectively With Difficult Clients and Broker Gone Bad? What To Do If You Have A Complaint.)
The Advantages of Being an Insurance Representative
If any of the above consequences have more weight than potential benefits, perhaps a career as an insurance representative is a better fit. Perceived easier certification exams and almost guaranteed bonuses each year are some of the possible benefits.
- Exams are Perceived as Being Easier: While the state exams for life and health insurance should not be taken lightly, they generally encompass less material and, more importantly, less complicated material than the Series 7 exam. Therefore, they are considered by many to be "easier".
- Renewals Equal Big $$$: One of the biggest benefits of being an insurance representative is that every year when a client pays his or her renewal premium, the representative receives a renewal commission. These renewals add up over the years, particularly as the representative garners more and more clients. Over time, they can mean big (almost guaranteed money) for the representative each and every year. It is almost like an annuity!
- A Good Rep Goes a Long Way: For whatever reason, individuals tend to be more loyal to a good insurance representative than they are to a retail stockbroker. Perhaps this is because the insurance representative is protecting them and their assets in case of a disaster whereas a broker's job to make the client money (and that is much harder to do year in and year out). Another reason for this is the fact that there is greater potential for a broker to lose a client's money than an insurance representative.
The Disadvantages of Being an Insurance Representative
Although clients might stay with an insurance representative for longer, it will take more effort to obtain clients. In addition, insurance reps have fewer products to offer and their hours aren't nearly as flexible. Let's examine these drawbacks further.
- Countless Obstacles: Even if an insurance representative is able to convince a prospect over the telephone to meet with and then convinces the prospect to purchase a policy, there are several other things that can stymie the transaction. For example, the client may not want to go for a required blood test, or be willing to share his or her medical information.
Moreover, there is a chance that if the client is unhealthy that he or she might not meet underwriting standards. The point is that all of these obstacles can prevent an insurance representative from receiving his or her commission. This contrasts sharply with a typical brokerage transaction in which as soon as a client pays for a purchased stock, a commission is paid to the broker of record. The health of a client is not a factor.
- A Somewhat Limited Product Arsenal: While every insurance company is different, the majority of insurance companies offer only a few products. Among them, health insurance, whole life insurance, term life insurance and variable life insurance. While some insurance reps may also sell fixed and variable annuities as well as mutual funds (if they become Series 6 licensed), they are usually only permitted to sell products that have been developed by their firms.
In short, this differs greatly from the traditional retail stock broker or advisor who generally has the option to sell shares or debt instruments of literally thousands of public companies.
- Night Owls: Whereas some stockbrokers may stay late to make cold calls to prospective clients, the majority of insurance representatives are night owls. This is because they must often book their appointments in the evening when people are generally home from work in order to meet clients face to face and to take insurance applications. This is a major source of burnout, especially for up-and-coming representatives with young families at home.
There are definite pros and cons to becoming a broker and an insurance representative. When determining which profession is best for you, consider whether your temperament and preferred lifestyle will make a good fit in either profession. Also, keep in mind that your choice of career is not a final answer. The education and experience you've gained from one profession will most certainly be transferable into the next.