Broker

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What is a 'Broker'

A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.

2. The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.

3. A licensed real estate professional who typically represents the seller of a property. A broker's duties may include: determining market values, advertising properties for sale, showing properties to prospective buyers, and advising clients with regard to offers and related matters.

BREAKING DOWN 'Broker'

Traditionally, only the wealthy could afford a broker and access the stock market. The internet triggered an explosion of discount brokers, which allow investors to trade at a lower cost, but don't provide personalized advice. Because of discount brokers, almost anybody can afford to invest in the stock market.

Discount vs. Full Service Brokers

Discount brokers are able to execute any type of trade on behalf of a client, for which they charge a reduced commission in the range of $5 to $15 per trade. Their low fee structured is based on volume and lower costs. They don’t offer investment advice and brokers are usually paid on 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 are compensated by 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.

Brokers Held to a Lower Standard

Brokers are registered 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,” addresses the process of due diligence a broker must use in determining the reasonable grounds of the recommendation. The broker must make a reasonable effort to obtain information on the customers financial status, tax status, investment objectives and other information that can be 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 Advisors (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.