Financial Literacy

What is a Broker?

When it comes time to transact an investment, most people deal with a broker instead of facilitating the deal directly. A broker is an entity that buys and sells investments on behalf of the investor. There’s often a fee for this service. There’s a broad array of reasons to work with a broker—convenience, security and knowledgeability among them. It’s why there are brokers in every investment sector, from the stock market to the real estate market and beyond.

Brokers don’t just handle transactions. They’re also a resource for information, and they ensure every transaction complies with regulatory requirements. They might also sell services or products that aid investors, such as portfolio management tools or investment advice. The capabilities of brokerages vary, and depend largely on the scope of the audience they serve. 

A broker speaks with his client

Common Types of Investment Brokers

Investment brokers focus on different types of investments and serve clients transacting in those areas. For example, a stock broker specializes in securities, while a real estate broker focuses on real property. Even within these areas of focus, brokers may offer different levels of service. Some of the most common types of investment brokers include:

  • Full-service brokers. These are brokers capable of not only facilitating transactions, but advising on them as well. This might include market research, retirement planning and access to proprietary investment products. Full-service brokers can also trend into money management. Full-service tends to demand higher fees for a more complete range of service.
  • Discount brokers. These brokers offer the basics when it comes to trading—which is to say, no advice, recommendations or research. They maintain low-to-no costs for investors. This low-cost structure can attract investors to peripheral products the broker may offer outside of its core services.
  • Real estate brokers. Real estate brokers serve a wide range of purposes. They’re instrumental in determining the market value of property, listing and selling property and facilitating sales. Real estate brokers also engage in negotiations, prepare offers on behalf of buyers and see transactions through closing.

There are other types of brokers outside of these, as well. For example, annuities brokers specialize in these types of investments and can help soon-to-be retirees make smart investments for passive income. Regardless of what they transact in, brokers serve the same purpose: to facilitate investments.

A Changing Market For Brokers

Before the Internet, brokers were typically high-cost, and most brokers were full-service. The advent of digital trading brought down many of the barriers to working with a broker, and introduced a wave of discount brokers. Today, that idea continues to evolve with the concept of no-fee brokers. 

  • Traditional brokerages: Raymond James, Edward Jones and LPL Financial.
  • Modern discount brokerages: Fidelity, Charles Schwab and E-Trade.
  • Disruptive online brokerages: Robinhood, Webull and Coinbase (crypto).

There are still proprietary brokerages in existence, catering to high-net-worth clients. These companies tend to be wealth management-oriented and leverage broker services into a broader range of capabilities. This includes firms like SMB Capital, Jane Street Trading and First New York.

How Are Brokers Registered?

To facilitate investment transactions, brokers need to register with the appropriate authorities. This depends on the markets they deal in, as well as the level of service they offer. 

  • Stock market brokers need to register with the Financial Industry Regulatory Authority (FINRA). This is the broker-dealers’ self-regulatory body, which ensures that brokers follow strict standards when offering services to clients. For example, they must follow the Suitability Rule in making investment recommendations and make reasonable attempts to understand client needs and goals. 
  • Brokers acting in a financial advice capacity also need to register with the Securities and Exchange Commission (SEC) as Registered Investment Advisers (RIAs). RIAs must meet fiduciary standards and offer advice and products in the best interest of the investor. RIAs must also disclose fees and compensation rates upfront, as well as any affiliations that may cause a conflict of interest.
  • Real estate broker licensing varies from state to state. Each state has its own laws and regulations regarding broker services and the licensure that comes with them. That said, most conform to generally the same standards. The biggest difference between licensing across states comes in the types of relationships brokers can have with clients—usually to eliminate conflicts of interest.

Broker registration and accreditation serves to protect investors. Registered brokers need to maintain their accreditation and meet the standards of regulatory bodies, which safeguards investors who put their trust in brokers to transact on their behalf. 

The Advantages of Working With a Broker

There are three chief advantages of working with a broker to transact investments: convenience, security, and knowledgeability. 

  • Convenience. Brokers are an intermediary between exchanges and investors, and take the hassle out of dealing with the exchange. Coupled with market research and tailored investment advice, many investors leave the decision-making to brokers. 
  • Security. Registered brokers protect investors from bad decisions and financial liabilities. They also add a level of legitimacy to transactions that protects buyers and sellers of securities (and real property). 
  • Knowledgeability. No one knows the market better than the brokers that facilitate it. This knowledge allows brokers to make smarter decisions, preempt problems and better-serve investors with specific needs. 

Even beyond these core benefits, brokers serve to simplify investing. For those who want the peace of mind that comes with informed, transparent decision-making, brokers are a top option.

Evaluate Your Broker Wisely

Different brokers have different approaches to operation. Therefore, it’s important for investors to vet and evaluate brokers based on their specific needs. To enhance your investment education further, sign up for the Investment U e-letter below. In fact, we review different brokerages and investment applications on a daily basis!

Choose a broker that knows the market you’re interested in, and has a proven track record of helping investors succeed in it. Examine fee structure and services, and make sure the broker can meet your needs and expectations. A good broker can make all the difference in your investing trajectory!


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