Maybe you don’t have a stockbroker or maybe you are your own stockbroker, for example, if you use one of the online, discount firms like Etrade or Ameritrade. In either case, it is helpful to understand who this professional is and what he or she can do for you.
The professional stockbroker
A stockbroker is a licensed professional who buys and sells stocks and other securities for both individuals and institutions through a stock exchange or over-the-counter in return for a fee or commission. She is usually, but not always, associated with a brokerage firm. A stockbroker has at least a bachelor’s in accounting or finance and has passed a licensing exam. If you trade your own stocks in your own account, you don’t need a license, but if someone works for a financial institution and trades for you, they need to pass a test and be licensed and registered with the Financial Industry Regulatory Authority.
How does a stockbroker differ from a financial advisor?
The main difference between a stockbroker and a financial advisor is that the latter has a fiduciary obligation to their clients. A fiduciary is someone who has the discretion to act for someone else (the beneficiary) but does so in the beneficiary’s best interest. Since 2016, financial advisors have had a fiduciary relationship with their clients; that is, they are mandated to act in their clients’ best interests. This means that while making investment decisions and giving investment advice, financial advisors have to put their clients’ interests before their own. For example, they might have to recommend a position or product for a client that will not necessarily provide the advisor the highest possible compensation. Stockbrokers, on the other hand, owe a lower duty, they only need to provide advice that is suitable given the client’s resources. This means that the advice a stockbroker gives only has to fit a client’s needs.
Both stockbrokers and financial advisors earn money through commissions and fees
Financial advisors earn money by buying and selling investments on your behalf. Most are compensated through a combination of commissions and fees. For each transaction, they receive a commission, which is a payment that they receive for executing a transaction. They may also receive a salary if they are associated with a brokerage firm and a percentage of your assets if you have agreed to a managed account. They also may receive a fee from their financial institution for selling a particular product.
What can a stockbroker do for me that I can’t do for myself?
Although you pay for their services, a stockbroker provides some benefits, especially for a neophyte investor. For example, she will watch your investments on a regular basis so you don’t miss opportunities or lose money avoidably. Secondly, they can give investment advice based on her experience, her own research, or the research of the firm she is working for. They also can give you more general financial advice that includes tax liability, retirement goals and diversification of assets. It is important to understand what you are getting and what you are paying for when you hire a stockbroker. According to Personal Capital research, more than one-fifth of investors don’t know how much they pay in investment fees, and many don’t know that they are paying any fees at all.
If you are someone who likes to do their own research, study the market regularly and have total control of your investments, you might not need a stockbroker. You can make your own investment decisions and buy and trade securities for much less money by using one of the online brokerage firms. On the other hand, although you will pay more, a stockbroker can provide valuable guidance, especially for those entering into the land of investments for the first time.
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