Brokers
A broker is a
- firm or individual
- that engages in the business of buying and selling securities – stocks, bonds, mutual funds, exchange-traded funds (ETFs), and certain other investment products – on behalf of its customer (as broker), for its own account (dealer), or both.
A typical broker accepts and carries out orders to buy and sell investments. It also may make recommendations to buy, sell or hold a specific investment, and/or make recommendations of investment strategies (including account recommendations), and may agree to periodically monitor investments in some accounts. Brokers typically provide investment services on a transactional basis, in which you pay a broker a fee called a commission or markup every time you buy or sell an investment. You may pay other fees and costs related to servicing your account and the investments that you buy, sell or hold.
Selecting a broker
Brokers are required to act in your best interest when making a recommendation and not put their interest ahead of yours. At the same time, the way brokers make money creates some conflicts with your interests. You should understand and ask a broker about these conflicts because they can affect the services and recommendations they provide. Conducting a thorough inquiry into a broker’s services, fee arrangements, and investment offerings will help you select a broker capable of serving your investment objectives.
Before selecting a broker, you should consider:
- what services and products you need,
- what services and products the broker can provide,
- any limitations on what services and products the broker can provide,
- how much you will pay for services and transactions,
- how the broker gets paid,
- what conflicts of interest the broker may have when giving you investment recommendations, and
- whether the broker has legal or disciplinary history and, if so, for what type of conduct.
The services your broker provides and what fees you pay may be negotiable, but will ultimately depend on your account agreement with your broker. Make sure you read and understand this agreement, as well as the broker’s relationship summary and, for brokers that offer recommendations, Regulation Best Interest disclosures.
Brokers generally must register with the Securities and Exchange Commission and become members of Financial Industry Regulatory Authority (FINRA). Investor.gov has a free and simple search tool that allows you to find out if your investment professional is licensed and registered, and if the firm or person (registered representative) has had run-ins with regulators or received complaints from investors. Always check out both the person as well as the firm. Your state securities regulator may provide more information, so you may want to check with them also.
The Securities Investor Protection Corporation (SIPC) may protect you if a brokerage firm goes bankrupt or if your securities are stolen. You should check whether your brokerage firm has this important coverage. SIPC does not protect you against declines in your investment holdings.
Additional Information
Investor Bulletin: Top Tips for Selecting a Financial Professional
