What Are the Roles of a Stockbroker?
A stockbroker is a person who is licensed through FINRA to buy and sell stocks, bonds and mutual funds. To obtain the license, a stockbroker (registered representative) must pass a Series 7 exam to demonstrate an understanding of securities, debentures and mutual funds. He must additionally pass a regulatory test demonstrating a comprehensive understanding of the laws associated with the buying and selling of these items. While this is a state-by-state requirement, passing the Series 63 exam allows a stockbroker to solicit and work in any state where he has paid the appropriate fees. A stockbroker may work in one of many capacities for his clients with varying responsibilities.
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Transactions
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When a stockbroker is acting in a transactional capacity for a client, he is an order taker. In this role, all the stockbroker does is fulfill the client's instructions to buy or sell stocks, bonds or mutual funds. Because most stockbrokers work on commission, transaction brokers are becoming less popular since most investors who just need someone to fulfill buy/sell tickets can accomplish this with discount brokers or online brokerages for a lot less money. Most stockbrokers don't want to be transactional brokers either, since it increases the liability to them personally with their name on the ticket, effectively endorsing it unless explicit waivers have been signed. That isn't to say that a stockbroker won't do a transaction for a long-term client with whom he has a solid relationship.
Discretionary
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Some stockbrokers are given discretionary authority over a client's account. When this happens, a client places money into her account and the stockbroker has the legal ability to buy and sell investments within the account as he sees fit without reviewing the transaction with the client. Clients may do this when they trust the stockbroker to take advantage of short-term opportunities to get into great deals. Mutual funds are the best example of discretionary funds: Investors place their money into the mutual fund, and the mutual fund managers buy and sell according to market trends and opportunities according to the objectives of the fund. This is an important point. Even though the stockbroker has discretion, he still needs to use that discretion within the set parameters of the client's objectives.
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Recommendations
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Stockbrokers are always doing what is called "due diligence" on different investment opportunities. What this means is that they are constantly reviewing prices, economic trends and business developments to have the best information on which to make decisions. Once they have that, they will present the pros and cons to a client for them to make the final decision about buying or selling. In this relationship, the stockbroker functions as a researcher, salesman and transaction taker, with the client still maintaining all control over the decision. This is the traditional relationship between a stockbroker and a client.
Asset Management
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Many stockbrokers don't stop with just a Series 7 license. Many move on to get master's degrees and to take the Series 65 (Investment Advisor Exam) with possible other credentials in order to manage assets. This is different from discretionary duties since the stockbroker is getting paid for having assets under management and not per transaction. Within this type of managed account, the broker may or may not have discretionary authority just the same as he would in a commissioned account.
Financial Planning
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A large responsibility of a stockbroker is to create a financial profile for his clients that include a list of their assets, debts and objectives with investing. It also reviews their investment experiences and risk tolerance to make sure that anything and everything the stockbroker recommends is in accord with these parameters. As a by-product of sound profiling of a client, many stockbrokers become the first line in financial planning for their clients. Many brokers obtain insurance licenses as well to offer annuities and life insurance, since they already see the entire financial picture and have a solid relationship with their clients. Financial planning can extend to estate planning with a team that the stockbroker works with comprised of a trust attorney, CPA and bank trust officer.
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