What Is a Broker in the Financial Market?
A broker in the financial market works as an agent for institutional clients -- banks, insurance companies, asset managers, and pension funds -- or individual investors. Investors may not make direct transactions on securities exchanges in the United States. Brokers, also called investment executives or financial advisers, are registered representatives of broker-dealer member firms. They are registered by FINRA, the Financial Industry Regulatory Authority.
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Function
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Brokers assist their clients. If a client wants to purchase stock, a registered broker helps her. In a full-service broker-dealer firm, such as Morgan Stanley or Merrill Lynch, the broker accepts the client's instructions. The broker-dealer's electronic system routes the client's instructions to an exchange for execution. When the trade is complete, the broker advises his client about the transaction's price. The client may also transact securities through the firm's online trading portal according to their terms and conditions.
Effects
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Brokers solicit and develop accounts for their employer firm. An important part of the broker's job includes identifying new clients. A broker encourages customers to transact business with his firm. Brokers must operate according to rules and regulations governing the financial industry. They receive extensive training to perform their jobs. The employer firm sponsors new brokers sitting for licensing and registration exams.
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Considerations
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Upon registration, brokers receive internal training from their employer. They learn about products and services offered by the firm. They also learn how to help client's evaluate financial goals. They probe a client's risk tolerance. They review portfolios with assistance from the firm's research analysts.
Using premium services of a full-service firm usually means higher transaction costs. According to Kiplinger.com, transaction costs may affect investment returns. High-frequency or day traders may be more concerned with transaction costs than other investors.
Expert Insight
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According to "Making the Most of Your Money Now" (2010), choosing a full-service or discount broker-dealer depends upon an investor's preferences. Many investors manage their own securities accounts. However, investors making this choice should understand the financial markets and develop a disciplined financial plan. Certified Financial Planners and registered brokers may help investors write a financial plan, but it's ultimately up to the investor to implement the plan's steps.
Significance
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Brokers must establish trusting relationships with clients. Trust, along with performance, helps the broker-client relationship grow. Beginning any relationship requires communication: clients should communicate their needs and expectations to the broker. While some investors provide limited or full discretion powers to their broker, most do not. Discretion allows the broker to make financial decisions for his client.
Prevention/Solution
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Prospective clients of any broker should evaluate the member firm's products and services. Buying and selling international securities may attract an investor, but her broker-dealer may limit these transactions.
According to "International Securities Law and Regulation" (2008), ADRs, or American Depository Receipts, international mutual funds, or ETFs, exchange-traded international funds, suit many investors. However, other investors want to transact on an international exchange. Some companies may not list on exchanges outside of their local country market. Choosing the right broker involves obtaining the services needed to execute your financial plan.
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References
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