What to Know About Investment Brokers

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Contributor, Benzinga
March 30, 2020

If you’re thinking of investing but aren’t sure where to begin, an investment broker can be a great person to have on your team. Brokers provide research based advice and direct connections to the financial markets, helping you grow your investments wisely and meet your investment goals. 

Definition of an Investment Broker

Financial advisors and investment brokers both provide investment advice on the stock market. Each profession requires different licenses and offers different services. Before deciding which is a better fit for your needs, it’s important to understand the differences between them.

Financial Advisor

A financial advisor is an umbrella term for any financial professional who helps you manage your money and investments. Financial advisors often specialize in a particular area and may hold a series of related licenses. Many advisors are also fiduciaries, meaning that your financial advisor is legally obligated to act in your best interest by the Securities and Exchange Commission (SEC). Before working with a financial advisor, decide what your financial goals are and come up with a list of questions to help you determine if the advisor’s services fit your needs.

Investment Brokers

An investment broker is a licensed individual or firm that buys or and sells investments for a client. Brokers have to pass the Series 7 exam (General Securities Representative Exam) to hold a brokerage license, which is overseen by the Financial Industry Regulatory Authority (FINRA). Brokers help clients purchase investments such as stocks, bonds, mutual funds or securities in exchange for a commission.

There are many types of investment brokers. You can work with an individual broker to buy and sell investments. In addition to buying and selling investments, a full-service broker can also offer personalized investment advice and retirement planning. Discount brokers offer a limited scope of services, only executing the trades you want. Direct access brokers are an online alternative that provides platform access to trade directly with markets.

A broker can also refer to a brokerage firm such as Merrill Lynch or Charles Schwab. In this case, the firm acts as a middleman by providing basic services for buying and selling investments.

Individual Brokers vs Brokerage Firms 

If individuals and firms can both be brokers, what is the difference between the two?

Brokerage Firms

A brokerage firm is essentially an intermediary between buyers and sellers. While the services brokerage firms offer clients varies, their goal is to bring buyers and sellers together and facilitate at trade at the best price possible. In return, brokerage firms take a commission for their services. Brokerage firms can be advantageous for clients because they offer in-house research and can pool resources to better serve their clients.

Individual Brokers

Individual brokers are professionals who have passed their Series 7 exam and are licensed to buy or sell securities. Individual brokers typically work for a brokerage firm but can also work on their own. The difference between an individual broker and a brokerage firm is that you work with individual brokers directly when buying or selling investments whereas a brokerage firm is an intermediary that offers a variety of investment services.

Types of Brokers

 Full-Service BrokerDiscount BrokersDirect Access Brokers
WhereBrokerage firmOnline brokerage firmOnline brokerage firm
Personal Interaction with a BrokerYesNoNo
ServicesDiversified financial servicesBuys and sells stocks and securitiesIn-house investment, research and banking Buys and sells trades you order Platform access to trade securities directly with financial markets
Best forIndividuals with a significant investment portfolioIndividuals who want expert managementLong-term investorsIndividuals who trade frequently and have small portfoliosIndividuals who want more autonomyIndividuals who want to bypass a traditional brokerIndividuals who value speed and access
LocationsPhysical offices and online accessOnline direct trading platforms and physical officesOnline direct trading platforms
Fees and CommissionHigher feesCommissions on percentage of assets Lower fees and commissionsInvestors do research and chose investments themselves Lowest commissionsPriced on a per-share basisPlatforms can  carry a monthly fee

How Much Does an Investment Broker Cost?

Investment brokers typically charge per trade, with additional costs based on the level of service provided by the broker.

 Full-Service BrokerDiscount BrokerDirect Access Broker
ServicesMultiple services that factor into costs1 service: buying and selling stocksAccess to direct trading platforms
Cost$30-$200 per trade or 1%-2% assets under management (AUM)  Low flat fee $5-$30 per trade0 commissionPay per share commission (around $.004/share)A minimum trade amount (around $4)
Minimum Account BalanceYes, typically $500 or moreNoNo

How Much Does an Investment Brokerage Cost? 

Working with a brokerage firm offers many advantages such as in-house research departments and diversified financial services. However, extra services mean extra fees to cover costs. In addition to broker fees, you may be subject to:

  • Annual fees: Can range from $50-$100 per year
  • Inactivity fees: Can be monthly, quarterly or annually and total up to $300 per year
  • Research and data fees: In-house research and data services with monthly subscription fees of $20-$30 per month
  • Trading platform fees: Direct access to trading platforms costing as much as $200 per month
  • Account closing or transfer fees: Brokers charging typically a $50 fee to close or transfer accounts

How to Choose an Investment Broker or Brokerage 

With all of the options available to you, it can be hard to figure out what works best for your financial situation. Consider these tips:

  1. Think about your investment goals. Consider how much you want to invest, how much you are willing to risk and how much you are willing to put down for a minimum account balance.
  2. Consider your investment style. Do you want to be more autonomous and actively trade? Or, do you want to have an expert assist you and manage your portfolio?
  3. Decide what type of broker fits your investment style. If you want more services and contact with a personal broker, a full-service broker is a better fit for you. If you want more autonomy and faster action time, then a discount broker or direct access broker is better for you.
  4. Research the individual broker or firm. Use resources such BrokerCheck on the FINRA website to look up your broker’s education background, licensure and previous employers.

Determine Your Plan of Action

There are so many options for working with a broker that it can be hard to see the forest through the trees and know which one is right for you.

Ask yourself these questions: How active do you want to be in handling your investments and how much do you want to invest? Once you know the answers, you can determine the type of broker that best fits your style and begin researching their qualifications to see if they are a match for you and your investment portfolio.