A stockbroker is a licensed financial professional or brokerage firm that facilitates the buying and selling of securities on behalf of investors. Stockbrokers connect individuals and institutions to financial markets, allowing them to trade stocks, bonds, exchange-traded funds (ETFs), and other investment products.
Depending on the services they offer, stockbrokers may also provide investment recommendations, market research, and assistance with managing brokerage accounts.
Stockbrokers are different from financial advisors and investment advisers, although their services sometimes overlap. While stockbrokers primarily facilitate securities transactions, investment advisers generally provide ongoing investment advice or portfolio management services.
Because stockbrokers handle investors’ money and securities transactions, they must follow strict financial regulations designed to protect their customers.
In this guide, our team at the Law Offices of Robert Wayne Pearce, P.A. explains what stockbrokers do, the different types of brokers, how they earn money, and the legal responsibilities they owe investors. We’ll also explain how to evaluate a stockbroker and recognize potential signs of fraud or misconduct.
What Does a Stockbroker Do?
A stockbroker executes securities transactions for investors, provides access to financial markets, and may offer investment guidance and brokerage account services. Their primary responsibility is to facilitate the buying and selling of securities through a registered brokerage firm.
Stockbrokers perform several important functions:
- Executing trades: When investors want to buy or sell stocks, bonds, ETFs, or other securities, their broker submits the orders for execution. Brokerage firms provide access to exchanges and other trading venues.
- Providing investment guidance: Some stockbrokers research securities, explain market conditions, and recommend investments based on their customers’ financial circumstances, investment objectives, and risk tolerance.
- Managing brokerage accounts: Beyond executing trades, brokers may help investors open accounts, transfer funds or securities, review holdings, and understand transaction statements. Some also offer additional account monitoring services.
For example, an investor who wants to purchase $10,000 worth of a particular stock can place an order through a brokerage account. The brokerage firm then routes the order for execution according to its trading procedures.
Some investors work directly with individual brokers, while others use online brokerage platforms to place transactions themselves (often without speaking to a broker at all).
The level of assistance you receive depends largely on the type of brokerage service you choose.
What Are the Different Types of Stockbrokers?
Stockbrokers generally operate through full-service or discount brokerage models, with different levels of personal assistance, investment advice, and fees. Online brokerage platforms also allow investors to manage their investments with relatively little direct involvement from a financial professional.
The three common brokerage service models include:
- Full-service brokers: These professionals offer personalized investment recommendations, financial research, and assistance with investment strategies. Some full-service brokerage firms also provide retirement planning, wealth management, and other financial services.
- Discount brokers: Investors who prefer lower trading costs can use discount brokerages, which focus primarily on executing securities transactions. They typically offer fewer personalized services, although many provide research tools and educational resources.
- Online brokerage platforms: Through websites and mobile applications, investors can open accounts, research investments, and execute trades themselves. These platforms generally cater to people who prefer managing their own portfolios.
Consider an investor approaching retirement who wants personalized assistance with investment decisions. A full-service brokerage might be suitable, while another investor who already understands the stock market might prefer a discount brokerage with lower trading costs.
Online trading platforms are generally a form of discount brokerage rather than a separate regulatory category.
Since brokerage services and pricing can differ considerably, you should understand how your broker earns money before opening an account.
How Do Stockbrokers Make Money?
Stockbrokers and brokerage firms earn money through trading commissions, account fees, investment-related compensation, and other brokerage services. Their compensation depends on the brokerage’s business model, the products offered, and the services provided.
Common sources of brokerage revenue include:
- Trading commissions: Brokers may charge a commission each time a customer buys or sells an eligible security. The amount depends on factors such as the security, transaction size, and brokerage agreement.
- Account and service fees: Certain account activities carry additional charges, including maintenance, asset transfers, and administrative services.
- Other compensation: Brokerage firms also generate revenue from markups and markdowns on securities transactions, margin loan interest, order routing arrangements, and compensation associated with certain investment products.
Many online brokerages now offer commission-free trading for eligible stocks and ETFs. However, investors may still incur other costs (including regulatory fees, investment product expenses, and transaction-related charges).
Another consideration is how a broker’s compensation might influence their investment recommendations.
Pro Tip: Review your broker’s compensation arrangements before accepting an investment recommendation. A broker who receives higher compensation for selling one product may have a financial incentive to recommend it over a less expensive alternative.
These potential conflicts are one reason investors should examine brokerage fees and compensation disclosures carefully.
Stockbroker vs. Financial Advisor: What’s the Difference?
Stockbrokers primarily facilitate securities transactions, while financial advisors may provide broader financial planning and investment management services. The main differences involve the services they provide, how they receive compensation, and the legal standards that apply to their work.
Stockbrokers typically work through registered broker-dealers and assist customers with buying and selling securities. They may also recommend investment products or strategies as part of their brokerage services.
Financial advisors, meanwhile, may offer retirement planning, portfolio management, tax-related planning, and broader financial guidance. However, the term financial advisor is broad and can describe professionals with different registrations and responsibilities.
Compensation arrangements can also differ. For example, a registered investment adviser may charge an ongoing fee based on the assets it manages, while a stockbroker may receive transaction-based compensation. Both brokerage and advisory relationships can involve other fee arrangements.
Some financial professionals are also dually registered, meaning they can provide both brokerage and investment advisory services (sometimes to the same customer).
In these situations, their legal obligations depend on which capacity they are acting in when providing a particular service or recommendation.
This distinction matters because licensing requirements and investor protections also vary according to the services provided.
What Qualifications and Licenses Do Stockbrokers Need?
U.S. stockbrokers generally must register through an authorized brokerage firm and meet applicable securities examination and registration requirements. These requirements help establish that brokers understand securities products, industry regulations, and their professional responsibilities.
Stockbrokers are subject to oversight by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and applicable state securities regulators.
Two important qualification examinations include:
- Securities Industry Essentials (SIE): This examination covers fundamental securities industry concepts, investment products, regulatory agencies, and prohibited practices.
- Series 7 examination: Passing this examination allows individuals to qualify for a broad range of general securities representative activities, provided they also meet the associated registration requirements.
Depending on their activities, brokers may also need to pass a state law examination, such as the Series 63, or obtain other registrations.
Many stockbrokers have degrees in finance, economics, or business, although a college degree is generally not a regulatory requirement.
After completing their registration, brokers must continue complying with the securities laws and professional standards that govern their dealings with investors.
What Are a Stockbroker’s Legal Responsibilities to Investors?
Stockbrokers must comply with securities laws and applicable FINRA rules, including requirements governing investment recommendations, disclosures, conflicts of interest, and customer account activity. These obligations are designed to protect investors against abusive practices and inappropriate financial recommendations.
Some of the most important responsibilities include:
- Regulation Best Interest (Reg BI): Under the SEC’s Regulation Best Interest, brokers must act in a retail customer’s best interest when making covered securities recommendations. This means considering factors such as the customer’s financial situation, investment objectives, risk tolerance, and the potential costs and risks of recommended investments.
- Disclosure and conflicts of interest: Brokers are required to disclose material information about their services, compensation, and conflicts of interest associated with covered recommendations. Brokerage firms must also establish procedures to address conflicts under applicable regulations.
- Customer protection and supervision: Securities regulations govern trade authorization, customer records, and brokerage transactions. Firms are responsible for establishing supervisory systems designed to detect and prevent regulatory violations.
Violating these obligations can carry serious legal consequences. Depending on the circumstances, brokers and brokerage firms may face regulatory sanctions, financial penalties, or investor claims for damages.
Of course, even with these protections in place, investors should investigate a broker’s professional background before trusting them with their money.
How Do You Choose a Trustworthy Stockbroker?
Investors should verify a stockbroker’s registration, investigate their disciplinary history, compare costs, and understand the services offered before opening an account. These checks can help you identify potential problems and select a broker whose services match your investment goals.
We recommend reviewing three important areas:
- Check FINRA BrokerCheck: Start with FINRA BrokerCheck to investigate a broker’s registration status, employment history, qualifications, regulatory actions, and disclosed customer complaints or arbitration proceedings.
- Understand fees and conflicts: Ask how your broker earns money, which investment products they recommend, and whether they receive additional compensation for selling particular securities. Review the account agreements and fee disclosures carefully.
- Look for warning signs: High-pressure sales tactics, promises of guaranteed returns, unexplained account activity, and vague answers about fees should all raise concerns about a broker’s conduct.
Pro Tip: Review your broker’s registration history and the brokerage firm’s records separately. A broker may have a relatively clean disciplinary history while working for a firm with significant regulatory problems.
Remember that customer complaints or arbitration disclosures alone do not establish wrongdoing. You should examine the circumstances and outcomes of any reported disputes.
If you discover suspicious activity after opening an account, investigate it promptly, as certain forms of broker misconduct can lead to substantial investment losses.
What Are Common Examples of Stockbroker Fraud and Misconduct?
Stockbroker misconduct can involve unauthorized trading, excessive trading, misleading investment recommendations, misrepresentation, or the misuse of customer assets. These activities can expose investors to unnecessary financial risks and potentially give rise to legal claims.
Some of the most common examples include:
- Unauthorized trading: This occurs when a broker buys or sells securities without obtaining the customer’s required authorization. For example, a broker managing a nondiscretionary account may execute trades without first receiving the customer’s approval.
- Excessive trading (churning): A broker exercises control over a customer’s account and engages in excessive transactions to generate commissions, satisfying the applicable legal elements of churning. Excessive trading can also violate Regulation Best Interest when a series of recommendations is contrary to the customer’s interests.
- Misrepresentation and unsuitable conduct: Some brokers mislead investors about investment products, conceal material risks, or recommend securities that fail to satisfy applicable investor-protection standards.
Misconduct can take other forms as well, including misappropriating customer funds, failing to execute customer instructions, and making improper recommendations involving speculative or high-risk securities.
Brokerage firms may also face liability for failing to supervise their brokers properly (particularly when inadequate oversight allows misconduct to continue).
Investors who suffer financial losses connected to these activities may be entitled to seek compensation through FINRA arbitration or other available legal proceedings.
Speak With Robert Wayne Pearce About Stockbroker Fraud and Investment Losses
If you’ve suffered investment losses because of stockbroker fraud, unauthorized trading, excessive trading, or other misconduct, you may have grounds to pursue financial recovery.
At the Law Offices of Robert Wayne Pearce, P.A., our securities litigation and investment fraud attorneys represent investors who have suffered losses involving brokers, financial advisors, and brokerage firms.
Depending on the circumstances of your case, you may be able to pursue compensation through FINRA arbitration or litigation.
Contact our firm today to schedule a consultation and have our team review your investment losses, your broker’s conduct, and your available legal options.
