Broker-Dealer Definition

First, what is a broker, and what is a dealer? When we talk about these terms in the context of finance, we are talking about the role that individuals play. A “broker” or “agent” exists to sell or facilitate the sale for another party. In essence, he/she represents the interests of his/her client. An example would be an agent selling a product on behalf of their client – say, life insurance – to another individual or company (the clients’ buyer). A “dealer” or principal exists to sell their own products. They buy low and sell high for themselves, with no representation of others’ interests. An example would be someone who sells his/her own life insurance policy to another individual. The term refers more specifically to companies that act as both a dealer and a broker. They deal with their own products – stocks, bonds, etc., but they also represent the interests of their clients by selling/facilitating the sale of other people’s products too.

Functions of a Broker-Dealer

Broker-dealers perform two main functions in the market:

1. Matching buyers and sellers/facilitating transactions.

These companies match up securities dealers with both institutional and retail investors through a variety of services, including investment banking, underwriting, market-making, trading, etc.

2. Advising clients on investments.

They also seek to enhance understanding of the markets among clients through research reports and other information sharing processes. Additionally, they provide options for purchasing stocks not listed on an exchange via over-the-counter (OTC) transactions.

Benefits of Having a Broker-Dealer

The benefits of having a broker-dealer include: 

Access to investment knowledge and expertise.

This means that more and more people who would otherwise not be able to access those knowledgeable experts or those experts’ products can do so. Brokers today serve as an intermediary between the purchaser and the product issuer (e.g., a mutual fund company).

More financial products available for purchase.

Many companies offer their wares through more than one platform (i.e., affiliate broker-dealer vs. broker-dealer, etc.), meaning that consumers have greater access to a wider variety of investment options than they would otherwise have had available.

How to Choose a Broker-Dealer

The task of selecting the best broker-dealer for your specific needs requires considering various guidelines:

What is your primary goal as an investor?

Investment goals vary from investor to investor. Some may be interested in basic financial planning considerations such as retirement, whereas others might be seeking capital appreciation or income. Once you know what your goals are, it becomes easier to narrow down the field of choices from there.

 How much money do you have?

Small accounts will incur relatively higher commissions because it costs more money to service smaller accounts. Broker-dealers need to be able to recoup their costs, so they charge higher commissions for smaller accounts. As your balance increases, you have more negotiating power with the broker-dealer because it no longer costs as much to service your account and thus can offer you a lower commission rate.

What is your risk tolerance?

Commission rates also vary depending on how risky or conservative of an investor you are perceived by the broker-dealer (i.e., based on your portfolio). Riskier portfolios incur larger commissions because those portfolios require more oversight and monitoring; those investors demand more attention from their agent/broker’s time.  

What are the costs of your investments?

Some broker-dealers offer commission-free funds. The merits behind this particular business model are that an investor may, in turn, incur lower total fees than if he/she hadn’t chosen to purchase those commission-free products. Alternatively, other broker-dealers will charge higher commissions on certain investment vehicles (e.g., buying mutual funds through them vs. another firm), but then drop their rates for larger balances.   These cost considerations – whether they be determined by the size of your account or your risk tolerance – can help you narrow down choices if you know what you’re looking for ahead of time.

Check out the reputation of the firm you’re interested in working with, as well as those that provide it with funding.

Try checking customer reviews online or asking organizations such as the Better Business Bureau what they’ve heard about the company you’re researching. Also scope out their website for information about their investor relations department, which typically includes details on its leadership team and company history.

Final Thoughts

The broker-dealer you choose should be based on all of the above factors, as well as other features that are unique to your individual needs. Not only do investors have options beyond traditional banking institutions when choosing where to keep their cash, but they also have an opportunity to use a broker-dealer for various financial products including stocks and bonds.   It is important to do your research into potential broker-dealers before deciding which one is right for you.

A broker-dealer is any person or company in the business of buying and selling securities. They are sometimes referred to as registered representatives, brokers, financial advisors, wealth managers, and so on. All trade securities for their own benefit (e.g., in order to obtain commission fees) but also legally act as fiduciaries that have clients' best interests at heart when creating investment plans and providing advice.
Broker-dealers typically earn money through brokerage fees. These pertain to fees charged for executing trades for their client.
Broker-dealers may be paid by charging commissions, fees for service, or a combination of the two.
The Financial Industry Regulatory Authority (FINRA) is the self-regulatory organization for broker-dealers in the United States. It oversees many aspects of its operations to ensure they are working in clients' best interests.
How much a broker-dealer earns depends on the services they provide and their skill level in comparison with other members of the industry.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.