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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. A broker also refers to the role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.

BREAKING DOWN 'Broker'

In the past, 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. Due to the emergence 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,” or KYC, 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.

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 market values of properties to be sold
  • listing and advertising the property for sale
  • showing the property to prospective buyers
  • advising clients with regard to offers 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

ln the United States, real estate brokers are licensed by each state, not by the federal government. Each state has its own laws defining the types of relationships that can exist between clients and brokers, and the duties of brokers to clients and members of the public.

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