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.

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Broker

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 charges a fee or commission for executing buy and sell orders submitted by an investor.
  • 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 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 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.

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 the market values of properties.
  • Listing and advertising the property for sale.
  • Showing the property to prospective buyers.
  • Advising clients about 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.

Broker Regulation

Brokers register 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 steps a broker must use to identify their client and their savings goals, which helps them establish the reasonable grounds of the recommendation. The broker must make a reasonable effort to obtain information on the customer's financial status, tax status, investment objectives and other information 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 Advisers (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 United States 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.

Real World Example of Brokers

These four top U.S. regulated brokers provide investors and traders access to financial markets. Brokerage rates as of May 2019.

TD Ameritrade: TD Ameritrade Holding Corporation (AMTD) provides trading in stocks, options, exchange-traded funds (ETFs), mutual funds, futures contracts and fixed income investments. The Omaha, Nebraska-based broker services 11 million accounts that total more than $1 trillion in assets and charges a flat rate of $6.95 per trade.

Charles Schwab: The Charles Schwab Corporation (SCHW) facilitates trading in most financial markets along with margin lending and cash management services. The broker operates more than 330 brick-and-mortar locations in 46 states and has $3.36 trillion in total client assets. Traders pay a $4.95 flat rate to trade stocks.

E*TRADE: Founded in 1982, E*TRADE Financial Corporation (ETFC) provides trading in a wide variety of securities, holding over three million brokerage accounts, with $285 billion in client assets. The broker offers its customers an assortment of educational resources relating to investing that helps warrant its flat $6.95 per trade commission rate.

Interactive Brokers: Interactive Brokers Group, Inc. (IBKR), with over $150 billion in client equity, offer some of the lowest commissions available at $.005 per share with a minimum of $1 per trade. The broker connects to any electronic exchange globally, which enables trading in equities, options and futures. Customers receive access to a wealth of tools for tracking and analyzing the financial markets.