What Is A Brokerage Firm? - Definition and Types of Brokerage Firms

The primary function of a brokerage firm is to serve as a go-between for those looking to purchase or sell a property. When a transaction is completed, brokerage firms often get revenue in commissions or fees.

These days, the exchange or the consumer, or perhaps both, may be responsible for payment. With the introduction of zero-commission trading, several discount brokerages have offset this loss of revenue by receiving compensation from the exchanges for bigger order volumes.

Understanding The Brokerage Firms

Brokerage companies would be unnecessary in a perfect market where everyone has complete knowledge and can act swiftly and properly based on that information. However, imperfect information, opacity, and asymmetrical knowledge characterize reality. Consequently, customers are unaware of the sellers and cannot get the best deal.

Sellers, on the other hand, are in the same predicament. Brokerage firms exist to assist their clients in finding the opposite party to a transaction, bringing buyer and seller together at the most advantageous pricing for both parties while also earning a commission.

Types of Brokerages

It all depends on the degree of service, how individualized it is, and whether or not humans or computers handle it.

· Brokerage Full-Service

There is a wide range of goods and services offered by full-service brokerages, also known as traditional brokerages.

In addition to current stock quotations, economic research, and market analysis. Personal interactions between brokers and clients are possible at these businesses, where highly-trained professionals are employed.

Certain traditional, full-service brokerage firms offer discount brokerage services and Robo-advisor platforms.

· Brokerage Discount

However, a cheap brokerage offers fewer comprehensive services and products and lacks the personal contact found with a full-service adviser; the breadth and quality of advice provided by discount brokers frequently rely on the size of an investor's accounts.

In addition to full-service brokerages, several organizations provide lower-cost discount brokerages. Using web-based or mobile app-based automated trading systems, these firms may charge consumers a cheaper commission rate because their customers do their research and transactions.

· Robo-Advisors

Automated portfolio management services, such as Robo-advisors, emerged in the late 2000s and have since become a popular way for investors to automate their portfolio management processes online.

Modern portfolio theory (MPT) is the most popular strategy among Robo-advisors. However, some Robo-advisors now allow customers to tweak their investing strategy if they want more active management.

It's not only the low costs and minimum account balances that make Robo-advisors so alluring; it's also the automation. Many Robo-advisors do not charge an annual fee or fees, and you may get started with as little as a few dollars to invest with them.

Brokerage: Independent vs. Captive

It's also critical to understand if your broker is simply linked with a certain group of firms or if they can provide you with a comprehensive list of options. Whether they adhere to the fiduciary or suitability standards is important to know.

· Separate Brokerage

However, unlike a full-service brokerage, an independent brokerage is not tied to one mutual fund business. Because these brokers are not linked to a single corporation, they can propose and sell customers items that are more likely to be in their best interests. Most independent brokers today are RIAs (registered investment advisers).

· In-House Brokerage

All of the products sold by captive brokerages are those of the captive mutual fund or insurance firm they are associated with. These brokers are hired by the mutual or insurance business to advocate and market the many products they possess. Compared to alternative possibilities, these items may not be in the client's best interest.

· Broker Regulation

The Financial Industry Regulatory Authority (FINRA), the self-regulatory authority for broker-dealers, requires brokers to register. By the "suitability rule," which demands that reasonable grounds support recommendations for specific products or investments, brokers serve their customers to the highest degree of ethical conduct.

"Know your customer" or "KYC" is the second guideline section. It deals with how brokers identify their clients and their savings objectives to provide acceptable reasons for their suggestions.

When providing a suggestion, the broker must make an honest attempt to learn about the client's financial situation, tax situation, and investment goals.

Real-World Example of Brokers

Brokers are registered with the Financial Industry Regulatory Authority (FINRA) for various purposes. In many cases, proprietary trading businesses are registered as brokers so that they and their traders have direct access to the exchanges.

Still, they do not provide broker services to the general public. Full-service or cheap brokers may play a different role here. A full-service broker can offer a wide range of additional services to wealthy customers, such as retirement planning or asset management and their primary position as a broker.

How to Locate A Broker

Brokers are simple to come by these days. Most investors should use an online broker because of online ordering cost savings and convenience. Discount brokers with minimal minimum investments and no recurring account fees are the ideal online brokers.

Many online brokers include libraries of instructional information on their websites that might assist you in getting started in the stock market if you're a beginner.