- In the world of investing, a broker is a company or individual that acts as an intermediary between you and a securities exchange.
- There are three main types of investment brokers: full-service brokers, online brokers, and robo-advisors.
- Beyond investing, brokers are used in other industries, including real estate and insurance.
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In the broadest sense, a broker is a licensed mediator between a buyer and a seller. Broker services are used across a range of industries, including real estate, insurance, and of course, investing.
Historically, investment brokers held the keys to Wall Street and were the only way for everyday individuals to buy and sell stocks. But with the rise of discount brokers, the need for brokers by their traditional definition have declined.
Here’s what you need to know about the investment brokerage industry, and how online brokers have changed the landscape of investing as we know it.
A stockbroker is a type of broker that allows you to buy and sell stocks, bonds, and other securities. When you choose a broker, you open a brokerage account, which is a fundamental step to becoming an investor.
Securities are bought and sold on stock exchanges, like the New York Stock Exchange and Nasdaq. Because these exchanges require special access or membership to trade, investors need brokers to facilitate transactions.
Broker firms and individuals become members of specific exchanges by meeting certain regulatory standards set by the Financial Industry Regulatory Authority (FINRA).
In addition to executing orders, brokers also provide a range of educational resources and investing advice. There are three main types of brokers:
- Full-service brokers: Traditional full-service brokers offer managed accounts that are overseen by a professional advisor. With a managed account, you agree to give the broker authority to make decisions on your behalf. Full-service brokers also offer a variety of perks including specialized market research and personalized advice. All of that, however, comes with fees, which is why they typically cater to well-heeled individuals.
- Discount brokers: Discount brokers execute trades on your behalf but do not offer tailored advice. While they once were the exception, they’re now the norm, preferred by investors because they’re more affordable and charge zero commission fees. What they lack in specialized advice, they usually make up with a vast array of tools and educational resources.
- Robo-advisors: Robo-advisors are automated investing platforms that select and manage investments on your behalf, typically in the form of ETFs or index funds. Robo-advisors appeal to those new to investing or those who prefer to be hands-off.
“In my experience, everybody wants full-service advice, but they just don’t want to pay for it,” says Winnie Sun, managing director at Sun Group Wealth Partners. “If all things were equal, if both costs were the same, without a doubt, people prefer full-service.”
A brief history of brokers
What do you picture when you think of an investment broker? Chances are, you might imagine a person in a suit, making frantic phone calls on the floor of a bustling stock exchange – which isn’t too far off from how things used to be.
In the past, only affluent investors could afford access to stock exchanges. Why? Because only high-net worth individuals – people with at least $US1 ($AU1) million in liquid assets – were able to afford the service.
But with advancements in technology and the growth of the internet came the rise of online brokerages, which paved the way for a new kind of investor: the self-directed investor, or those who are willing to manage their own investing portfolios.
Today, the brokers most people are familiar with are discount brokers, which include names like Robinhood, SoFi, and WeBull. Many of these smaller firms offer online platforms that have made investing and trading more accessible than ever before.
The overall shift has led to larger brokerage firms – including Charles Schwab, E-Trade, TD Ameritrade, and Fidelity – to slash commission fees in recent years in the hopes of capturing a greater market share of self-directed investors.
Full-service brokers vs. discount brokers
Keep in mind that just because you can manage your own portfolio, doesn’t necessarily mean you should. There remain instances in which an investor, specifically a high-net worth individual or one with advanced financial needs (who doesn’t mind paying for the extra perks), may still wish to work directly with a full-service broker.
Deciding whether to work with a discount or full-service broker depends on factors like an individual’s investment knowledge and financial status. Most discount brokers who specialize in the stock market are able to charge low commission fees by operating through online platforms with low overhead costs.
“I don’t think one [strategy] is necessarily better than another, it’s just where you are in your life,” says Sun.
Though the lower cost is the major lure to working with a discount broker, it should be noted that they don’t offer investment advice, tax planning, or personal consultations on their clients’ behalf. Discount brokers simply execute orders for clients, offering lower fees by sidestepping the money otherwise spent closing deals for clients with a high net worth.
Broker regulation: What you need to know
Entrusting another individual or firm with your investment proceedings is a major responsibility, so it’s important that your broker meets certain criteria.
If you ultimately decide on an individual broker, be sure the professional you work with is a registered investment advisor (RIA). RIAs are bound by SEC regulations and are held to a fiduciary standard.
Sun advises those seeking to work with an investment professional to work with someone with this fiduciary designation. “It’s so important because you know that when someone’s giving you advice, they’re doing [with] your best interest [in mind], and they’re required to based on the licenses that they have,” she says.
In the US, registered brokers are required by the FINRA to pass the General Securities Representative Exam, a 125-question, multiple-choice test which comes with FINRA Series 7 certification when completed. The Series 7 gives a broker the authority to buy and sell most securities, but it doesn’t necessarily end there.
The Series 63 and Series 66 exams are also required by the FINRA to become a registered broker in various states, and the Series 53 exam permits brokers to buy and sell municipal bonds.
The financial takeaway
A broker is an individual or firm that buys and sells stocks on behalf of clients.
Stockbrokers, in particular, have evolved considerably with time, and now most commonly come in the form of online discount brokers.