Broker: Definition, Types, Regulation, and Examples

What Is a Broker?

A broker is an individual or firm that acts as an intermediary between an investor and a securities exchange. Or a broker can be a licensed real estate professional who typically oversees other real estate agents or an entire real estate brokerage.

A stockbroker buys and sell stocks, among other securities, on behalf of investors. Because securities exchanges only accept orders from individuals or firms who are members of that exchange, individual traders and investors need the services of exchange members.

Key Takeaways

A broker is an individual or firm that acts as an intermediary between an investor and a securities exchange, usually buying or selling securities for investor clients.
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 the Financial Industry Regulatory Authority (FINRA), while investment advisers register through the SEC as registered investment advisors (RIAs).

Understanding Brokers

Financial brokers provide securities trading services and are compensated in various ways, either through commissions, fees, or through being paid by the exchange itself. Investopedia regularly reviews all the top brokers and maintains a list of the best online brokers and trading platforms to help investors decide what broker is best for them.

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 that 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. However, online brokering triggered an explosion of discount brokers, which allow investors to trade at a lower cost, but without personalized advice.

Discount vs. Full-Service Brokers

Discount brokers can execute many types of trades on behalf of a client, for which they charge little or no commission for trades. 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 a commission. Most discount brokers offer an online trading platform that attracts a growing number of self-directed investors. Such services usually charge $0 in commissions.

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 their 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. In that case, a financial planner's compensation includes a percentage of a client's assets under management (AUM), rather than from a commission.

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, provisions, 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 also, 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

Securities 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 that there be reasonable grounds for recommending a specific product or investment.

The second part of the rule, commonly referred to as “know your client,” or KYC, addresses the steps a broker must use to identify their client and their savings goals, which helps them establish the reasonable grounds for their recommendations.

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 U.S. are licensed by the states, 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.

A securities broker must make a reasonable effort to obtain information on the customer's financial status, tax status, investment objectives, and other information when making a recommendation.

Examples of Brokers

Full-service brokers tend to use their role at a brokerage as an ancillary service available to high-net-worth clients, along with many other services such as retirement planning or asset management. Examples of a full-service broker might include offerings from a company such as Morgan Stanley, Goldman Sachs, or Bank of America Merrill Lynch.

The larger brokerage firms tend to carry an inventory of shares available for sale to their customers. They do this to help reduce costs from exchange fees, but also because it allows them to offer rapid access to popularly held stocks. Other full-service broker firms are actually agency brokers. This means that unlike many larger brokers, they carry no inventory of shares, but act as agents for their clients to get the best trade executions.

An example of this would be if a high-net-worth investor named Amy wanted to place a large buy order for Tesla Inc. (TSLA) stock. Amy would call or message her broker, telling them to execute the buy order of, say, 10,000 shares. This is an order of more than $1 million, so Amy feels more comfortable having a broker execute the trade directly.

The broker receives the order and if the brokerage has those shares available, they will most likely fill Amy's order immediately. If it doesn't, it could buy those shares on the exchanges or from other brokerages. The brokerage may not place the order in the amount of 10,000, instead grabbing 500 to 1,000 shares at a time to deliver to Amy after the funds settle.

What Exactly Does a Broker Do?

A broker facilitates trades between individuals/companies and the exchanges where the broker is licensed. Depending on the nature of the trade and marketplace, a broker can either be a human being who is processing the trade themselves or a computer program that is only monitored by a human. Typically, stock trades are computerized, whereas something like real estate requires a more personal touch.

Do Brokers Make Money?

Yes, brokers are often well-paid. The salary a broker receives depends on a lot of factors, mainly the worth of the clients they are servicing or if they are brokers for businesses such as commercial real estate owners and sellers. A typical stockbroker may make a salary and a commission on trades managed, and had an average salary of $161,399 as of late July 2024.

What Is a Broker and Why Do I Need One?

A broker is an intermediary between those who want to invest and make trades and the exchange at which those trades are processed. You need a broker because stock exchanges require that those who execute trades on the exchange be licensed. Another reason is that a broker ensures a smooth trading experience between an investor and an exchange and, as is the case with discount brokers, usually won't charge a commission for normal trades.

How Do You Become a Broker?

Becoming a broker depends on a few things. First, having a background or degree in finance or economics will be extremely helpful. This may get you noticed, but to actually be hired and perform as a broker, you will need to be appropriately licensed.

How Do a Real Estate Agent and Broker Differ?

Real estate brokers are licensed to do everything a real estate agent does, including negotiating and writing property transactions, but brokers can also help agents with any issues that arise during the home-buying or selling transaction. Brokers have a higher level of licensing, which requires more classwork hours and tougher exams, so they can supervise and guide agents and oversee transactions. When shopping for a home, you’re more likely to work with an agent, as most brokers spend their days supervising the real estate brokerage and its agents.

The Bottom Line

Brokers of securities make a salary, working through the day ensuring smooth transactions between their clients and the exchanges. Brokers can physically present trades but more often than not, they monitor trades from their computers and are only needed to intervene in the case of an exceptionally large or unique trade.

In real estate, a broker is a licensed professional who typically represents the seller of a property and may oversee a team of agents at a real estate brokerage.