Brokerage Firms Definition
Brokerages are intermediaries that align corporations in search of capital, alongside savers looking to invest money. In exchange, brokers earn fees according to the level of service that is provided. Brokerages must establish trust to be effective, and are therefore highly regulated. Despite government regulations, the financial services industry presents distinct risks to the overall economy.
Other People Are Reading
-
Identification
-
Brokerages unite buyers and sellers of investments together. Brokerages carry a fiduciary responsibility to transact business on your behalf. Fiduciaries are legally bound to operate in a manner that prioritizes the investment goals of each customers above those of the firm. As a fiduciary, brokerage firms must report any conflict of interest to their clients. For example, a broker may also function as a dealer that buys and sells securities for its own account. Brokers sometimes sell these investment holdings to their own clients. In these situations, the brokerage must disclose that it is operating as a dealer.
Features
-
Brokerages offer varying amounts of service to attract clientele and capture market share. Discount brokers are typically associated with online trading. Discount brokers do not make investment recommendations. These brokers simply accept and execute your orders to buy and sell securities. Discount brokers make money by charging relatively low commissions to execute trades. Full-service brokers, or financial advisers, make investment recommendations and coordinate financial plans for your benefit.
Aside from stock trading, your financial plan may offer advice upon cash management and insurance strategies. Financial advisers may accept commissions, or charge your account by a percentage of its assets held under management. Fee-based financial advisers, however, strictly charge annual fees for writing financial plans--without accepting commissions associated with your subsequent trading activity.
-
Considerations
-
The Securities and Exchange Commission, State securities officials, and the Financial Industry Regulatory Authority (FINRA), all carry special jurisdiction in terms of brokerage firm regulation. Individual brokers are required to pass special examinations throughout their careers to enter, and continue, within the business. Meanwhile, financial intermediaries must comply with numerous securities laws that are designed to protect clients and preserve confidence within financial markets. For example, the SEC prohibits brokerages from using aggressive sales tactics to offer penny stocks toward smaller investors. Penny stocks represent obscure companies that are associated with large losses and bankruptcy.
History
-
In response to the Great Depression, the Glass-Steagall Act of 1933 made it illegal for financial institutions to function as a broker, commercial bank, and insurer. The Gramm-Leach-Bliley Act, however, effectively repealed Glass Steagall in 1999. As of 2010, brokerages often function as part of financial conglomerates, such as Bank of America, that can cross-sell investments and insurance products, while accepting deposits. Brokerages that merge into large financial conglomerates increase the likelihood of financial system collapse. In recession, the Federal government may be forced to bailout these too-big-to-fail firms and avoid complete economic failure.
Warning
-
Online brokerages expose investors to phishing scams, where identity thieves steal your account information to place unauthorized trades. These trades drive up the price of a particular stock--so that criminals may then liquidate their own shares at a profit.
-
References
Resources
- Photo Credit wall street with flag image by Tomasz Cebo from Fotolia.com
