A broker-dealer can be considered as a single entity person, company or any other business organization who basically deals with the business of trading and execution of financial securities, stocks, commodities or derivatives on behalf of its own or of its customers for which it charges certain commission which is the main source of income.
A layman’s language broker-dealer is simply a person or a business firm who helps investors buy sell securities, offer them intelligent information regarding trade and help them book profits while in return charge a certain amount of fees as commission which are their main source of revenue generation. Nowadays with the advent of technology broker-dealers have also gone online where an investor even without speaking to them can buy sell securities and book profits and in the same way as offline brokers here too the marginal commission is deducted from the profit the investor makes. There is a thin line of difference between broker and dealer though; a broker supports security trade on behalf of the investor, a dealer, on the other hand, engages in trading activities on behalf of it.
Types of Broker-Dealers
- Wirehouse: This type of broker-dealer generally operates on a big scale and has a large and expanded service. They typically have their own set of products which they further sell to their customers and make money on the same.
- Independent: They perform more of an agency or the relationship of an agent. They are independent contractors to the customers and generally sell products which are not owned by it but are procured from outside. They help the customer to connect to such outside products, buy and sell them and book the profits. In return, they charge the customer with a certain margin or commission based on the overall trade.
- A broker initiates the trade on behalf of its customers and is involved in the trade cycle.
- A dealer, on the other hand, is representative of the brokerage firm and will initiate the trade on behalf of the account which the firm itself owns.
- The broker has to ensure there is enough liquidity in the market and also cater to the requirement of what its client desire.
- The broker has to make sure it provides effective advice about diversification of the client’s portfolio and also suggest different avenues for the client to park his/her money.
- The broker-dealer has to maintain the confidentiality of each and every client and ensure that no bank details or any personal information being misused.
- Broker-dealers also help in publishing investment research materials specific to shares or trading related which help their customer to get a brief idea about their portfolio
- Brokers also play a key role in raising capital for companies by going into the free market and seeking investors to invest in a particular company
- A broker functions as an agent to its customer and dealers acts like the principal to its own account
Roles of a Broker Dealer
- They act as the intermediary between investors and the company where one wants to invest.
- They also play a key role in helping a company raise their finance in the form of capital requirements.
- Dealers are the ones who act on the stance of the brokerage firm itself and initiate the transaction for the account of the firm
- They play a key role in providing liquidity to securities by supporting the trade of securities in a free market and at times make transactions i.e. Buy or sell securities from their own accounts to ensure the marketability of the security.
- They also get themselves involved in the underwriting process of the securities concerned.
How to Become a Broker-Dealer?
There are overall five steps of becoming an independent broker-dealer which are as follows:
- The first and foremost step here is to obtain necessary certificates and licenses from the federal and state which will give permit the person or business to deal with investment products. These generally vary in accordance with the type of product on is involved with. Along with this, the broker-dealer has to pass a certain level of examination which is compulsory for selling any kind of security on a direct basis to the client or customer.
- The next step requires you to become a registered member of FINRA i.e. Financial Industry Regulatory Authority which acts as a regulator or any other self-regulatory organization.
- The third process is that you have to become a member of SIPC or Securities Investor Protection Corporation. SIPC helps investors to be compensated in case of the investment company goes bankrupt or becomes solvent.
- The fourth step is to provide an application form also called the BD form for every state where the broker has made a strategy to sell its products. This form is provided to SEC which helps to identify the broker’s personal information like contact and if there is any conflict of interest.
- The final step is to adhere to any pending formalities of any state where the broker plans to sell its product and thus duly complete the certifications if required. SEC has a complete set of guidelines pertaining to all the formalities which may vary state to state and the broker-dealer has to duly follow that.
As of 2019 data, the average salary of independent broker-dealer working for a firm can be around $90,000 per year. It can also go as high as $180,000 based on the experience and expertise one possesses. The primary way they make money is via the brokerage fees too. This is the fee charged for executing a trade. A full-time serviceable broker can charge anything close to 2% of the total transaction money. On the other hand, the online broker charges comparatively less which maybe like $5 – $20 on a trade to trade basis.
Broker-dealer are the key people one will interact with when it comes to our investing needs. They are on a paid basis but duly help the customers to execute the trade and also make money. They also offer intelligent advice based on their experience so that the customers don’t end up losing money. They make sure that the portfolio of the customer is built in the most efficient manner where there is ample scope of diversification too.
This has been a guide Broker-Dealer and its definition. Here we discuss types of broker-dealer, how to become it, along with its function, roles, and salary. You can learn more about accounting from the following articles –