A broker is an intermediary in the financial world who helps perform transactions on behalf of a client. This is different than an investor or “first party” buyer, who is making moves for their own direct benefit.
The term can apply to a big institution that performs these acts or to individuals who interact directly with customers on a one-on-one basis.
The broad term “broker” can cover a lot of circumstances and can refer to a wide array of institutions – from cryptocurrency broker Coinbase Global Inc. (ticker: COIN) to traditional stock broker Merril Lynch to real estate brokers like ReMax and a host of others. The term can also refer to the individual within those institutions who deals personally with clients.
In simplest terms, a broker buys and sells various products on behalf of customers. But based on the area of investing interest, there are many other support functions that a broker might provide beyond the transaction itself.
One prominent example is a stock broker that helps individuals manage their money and make trades. In the online age, you can do that directly and without human contact through a digital broker, completely on your own. Firms like Charles Schwab, Robinhood and Vanguard are all considered brokers (or brokerage houses) at the firm level and offer these services – often without a lot of interaction with end users. In contrast, some clients may want the added dialogue that comes with talking directly with an experienced individual stock broker. In this case, Jane Doe who works at your local Schwab office is also considered a broker.
There are also bond brokers, futures brokers and real estate brokers. The specific duties beyond simply booking a transaction can vary widely depending on the area, as well as based on the cost structure involved.
Brokers typically make money through commissions or fees on the services they render. A common example of this is the structure for real estate brokers, where the typical arrangement is a 6% commission split equally between the buyer’s agent and the seller’s agent. The work they do before the sale, whether it’s 15 hours or 150 hours, is irrelevant. They get paid at closing, or not at all.
This traditional notion of commission-based broker services is increasingly being disrupted, however. In the aforementioned example of real estate, some firms compete by offering a fixed fee structure rather than a percentage – which, in some housing markets, can save clients a lot of money. The same is true for investing, where some financial advisors and brokers offer a fee-based structure that is designed to put clients in the best option possible instead of one that pays a higher commission.
Some brokers even offer a commission-free model, where they look to make money in ways beyond individual transactions. In the case of some modern stock brokers that offer zero fees on trades, these firms instead make money based on other related services. These services include premium membership fees, interest on uninvested cash or other alternative revenue streams that add up when done at scale.
As with so many things, the process of becoming a broker differs based on the kinds of services that a broker wants to provide. But generally, most brokers are required to have some kind of license as a way to validate their knowledge of the products they are selling, and often have related training or education.
In real estate, for instance, brokers must take a state-approved real estate sales course and pass their local licensing program requirements. In the case of stock brokers, the exams and licensure are administered at a national level through the Financial Industry Regulatory Authority.
But in simplest terms, someone generally becomes a broker through training, a formal examination and ultimately obtaining a license to do business on behalf of clients.
In the best cases, brokers listen carefully to their customers and use their expertise to help provide custom solutions that are the most appropriate for the situation. In the worst cases, however, brokers put their commissions first and their clients second.
When you’re looking for a broker, it is important to clearly understand how they make money. For instance, are they incentivized to put you in one kind of product over another? Or are they paid based on a percentage of a transaction instead of a flat rate, and thus paid more when you spend more money?
It’s also important to understand their training and experience. For instance, a real estate broker can be licensed with just a high school diploma and no prior real estate transactions to speak of. But if you’re looking for your first house in a new area, you probably want someone who not only knows the process but also understands the local market.
Last and most important, you want to feel like you can trust your broker. It’s always stressful when large amounts of money are at stake or when there are complex financial products involved that are hard to understand. The last thing you want to worry about is whether your broker is acting in your best interest in cases like these.
FAQs
A human broker is not always required, if you know what you’re doing and don’t need help. But even if you have investing knowledge, in the vast majority of cases you would still need to be registered and licensed to buy and sell products. That means at minimum you need a go-between entity like an electronic broker – or as they’re sometimes called, a brokerage house – to process the trade through approved channels.
As with so many things in investing, the answer is “it depends.” Some low-cost brokerage platforms offer free trades but a no-frills approach for investors who either already know what they want or will do their research elsewhere. Other electronic brokers offer sophisticated, institutional-grade charting and analysis for a fee. And then there are human brokers who offer a customized, hands-on approach but charge for that additional level of service. In short, your cost structure depends on the kind of broker, investing product and related services you’re looking for.
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