Agent

DEFINITION of 'Agent'

An agent in the financial sense is any person who has been legally empowered to act on behalf of another person.

BREAKING DOWN 'Agent'

An agent is a person who is employed or obligated to act on behalf of a person or to represent them in negotiations or dealings with third parties. The agent-client relationship can be legally enforced if the terms of the contract have been disclosed, and agents have an obligation to perform their designated services promptly and diligently. They also cannot enter into any other contracts which would interfere with their outstanding contractual obligations as agents.  

Two of the most common kinds of agents are attorneys, who represent their clients legally, and stock brokers, who are hired by the actual investor to make investment decisions and manage their portfolio. The person being represented by the agent in these scenarios is called the principal.  In the financial world, it refers to a fiduciary relationship by which an agent is authorized to perform transactions on behalf of their client. Legally speaking, there are three broad classes of agents:

  • Universal agents: universal agents have a broad mandate to act on behalf of their client. Oftentimes these agents have been given power of attorney for their client, which gives them considerable representative power in their client's legal proceedings. Sometimes these kinds of agents are also authorized to make financial transactions on behalf of their clients.
  • General agents: agents who are contracted to represent their client for specific types of transactions or proceedings over an agreed-upon period.
  • Special agents: authorized to make a single transaction or series of transactions over a brief period of time.  

Individuals will hire agents to perform tasks which they feel they do not have the time or expertise to perform themselves. Many people will think of sports, real estate or talent agents when they think of the agent/principal relationship, and these kinds of professional relationships do hold to that principle. Athletes, actors and prospective homeowners may prefer to broadly empower an agent to negotiate on their behalf because the agents are more familiar with the industry and have a better idea of how to position their clients to negotiate the most favorable contracts. Another possible scenario is agency by necessity, which occurs if an individual is in no position (if they are in a coma, or otherwise incapacitated) to make a time-sensitive decision. Businesses often hire agents to represent them on a particular venture or negotiation. Legally, corporations must hire agents to represent them, since corporations are fictitious legal entities and can't represent themselves.

Would-be investors generally solicit the services of a stock broker to act as a middleman between them and the stock market, a very common form of the agent/principal relationship. Even finding an online brokerage service through which to make investments involves authorizing the brokerage to act as one's agent. Hiring an agent to manage one's investments can be extremely advantageous; markets fluctuate rapidly and even if an individual investor is paying close attention to the assets in their portfolio, they may nevertheless lack the expertise to act most effectively on their own behalf.

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