What Is a Broker-Dealer?
A broker-dealer (B-D) is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers. The term broker-dealer is used in U.S. securities regulation parlance to describe stock brokerages because most of them act as both agents and principals.
A brokerage acts as a broker (or agent) when it executes orders on behalf of its clients, whereas it acts as a dealer, or principal when it trades for its own account.
Key Takeaways
- A broker-dealer is a financial entity that is engaged with trading securities on behalf of clients, but which may also trade for itself.
- A broker-dealer is acting as a broker or agent when it executes orders on behalf of its clients, and as a dealer or principal when it trades for its own account.
- There are thousands of broker-dealers comprising two broad categories: a wirehouse, which sells its own products, or an independent broker-dealer, which sells products from outside sources
Understanding a Broker-Dealer
Broker-dealers fulfill several important functions in the financial industry. These include providing investment advice to customers, supplying liquidity through market-making activities, facilitating trading activities, publishing investment research, and raising capital for companies. Broker-dealers range in size from small independent boutiques to large subsidiaries of giant commercial and investment banks.
There are two types of broker-dealers:
- A wirehouse, or a firm that sells its own products to customers; and
- An independent broker-dealer, or a firm that sells products from outside sources.
There are over 3,298 broker-dealers to choose from, according to a 2023 report from the Financial Industry Regulatory Authority (FINRA). Some of the largest broker-dealers include Fidelity Investments, Charles Schwab, and Edward Jones.
How a Broker-Dealer Works
By definition, broker-dealers are buyers and sellers of securities, and they are also distributors of other investment products. As the name implies, they perform a dual role in carrying out their responsibilities. As dealers, they act on behalf of the brokerage firm, initiating transactions for the firm’s own account. As brokers, they handle transactions, buying and selling securities on behalf of their clients.
In their dual roles, they perform a couple of vital functions; they facilitate the free flow of securities on the open market, and they buy or sell securities in their own accounts to ensure there is a market in those securities for their clients. In this regard, broker-dealers are essential, and they are also well-compensated, earning a fee on either or both sides of a securities transaction.
Special Considerations
Broker-dealers that are tied directly to investment banking operations also engage in the underwriting of securities offerings. When a broker-dealer acts as an agent of the issuing company, either as a principal underwriter of the stock or bond offering, or as a member of the underwriting syndicate, they enter into a contractual arrangement, acting on a “firm commitment” with the issuer that obligates them to distribute a certain amount of the securities offered to the public in exchange for an underwriting fee.
They may also acquire a piece of the securities offering for their own accounts and may be required to do so if they are unable to sell all of the securities.
Once the underwriting process is completed and the securities are issued, the broker-dealers then become distributors, and their clients are typically the target of their distribution efforts. In that effort, the financial advisors of the firms then act as brokers to solicit their clients and recommend the purchase of the security for their accounts. In this regard, the broker-dealers are facilitating the interests of the issuer, themselves (in the collection of a distribution fee), and their clients, although their only contractual obligation is to the issuer.
FAQs
A broker-dealer is a financial entity that is engaged with trading securities on behalf of clients, but which may also trade for itself. A broker-dealer is acting as a broker or agent when it executes orders on behalf of its clients, and as a dealer or principal when it trades for its own account.
How does a broker-dealer work? ›
A broker is an individual or firm who acts as an intermediary between a buyer and seller, usually charging a commission. A dealer is any person in the business of buying and selling securities for his or her own account, through a broker or otherwise.
What is form BD broker-dealer? ›
The Form BD is the Uniform Application for Broker-Dealer registration with the SEC, SROs and jurisdictions. It provides background information on the applicant and the nature of its business. It includes lists of the executive officers and general partners of the company.
What is a broker-dealer in private equity? ›
Simply put, a broker-dealer is an agent that assists you in raising capital for your private company. Broker-dealers can be small, independently working firms or ones that operate as part of large banks and investment firms.
What is an example of a broker-dealer? ›
Wirehouses like Morgan Stanley and Wells Fargo, discount brokerages like Charles Schwab and TD Ameritrade and independent firms like LPL Financial and Raymond James are all broker-dealers. Robo-advisors like Betterment and Sofi have affiliated broker-dealers (Betterment Securities and Sofi Securities).
What are the risks of broker-dealers? ›
Broker-dealers, like all businesses, live in a world of risk – operational risk, legal risk, reputation risk, managerial risk, credit risk, among oth- ers. Of course, the overarching concern – regulatory risk – is something unique to regulated entities.
How are broker-dealers compensated? ›
Firms receive compensation for the sale of products and services, which might include: – Commissions/markups on equities, bonds, and structured notes; – Loads, 12b-1 fees, and share of management fees for mutual funds; – Up-front and trailer payments on hedge funds and private equity funds; and – Advisory fees for ...
What does BD mean in trading? ›
A broker-dealer (B-D) is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers. The term broker-dealer is used in U.S. securities regulation parlance to describe stock brokerages because most of them act as both agents and principals.
Does form BD need to be notarized? ›
Form BD must first be submitted electronically and then a signed and notarized copy of the form must be sent to FINRA.
What does BD mean agency? ›
Business Development (BD)
Top Independent Broker-Dealers in the USA | 5-Star Broker-Dealers
- LPL Financial. Fees (2023): $4,135,681,000
- Northwestern Mutual. Fees (2023): $1,709,405,000
- Commonwealth Financial Network. Fees (2023): $1,611,255,947
- MML Investors Services LLC. Fees (2023): $935,700,000
- Kestra Financial Inc. ...
- Centaurus Financial Inc.
Access to additional services — While both options will act as custodians for your assets, banks will generally offer more in-depth advisory and reporting services, while broker-dealers may focus on offering market research and trade recommendations.
Is Charles Schwab a broker-dealer? ›
Charles Schwab & Co., Inc. ("Schwab," "we," or "us") is a broker-dealer registered with the Securities and Exchange Commission (SEC).
Why do you need a broker-dealer? ›
Broker-dealers play an important role in the financial markets, as these firms provide the infrastructure that facilitates stock trading. In fact, if you want to buy stock, you must open a brokerage account through a brokerage firm.
Is JP Morgan a broker-dealer? ›
J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA, and SIPC.
What is the difference between a broker and a broker-dealer? ›
A broker-dealer is an individual or firm that buys and sells securities either for their own account or on behalf of a client. Specifically, A broker buys and sells securities for a client's account. A dealer buys and sells securities for their own account.
What is the difference between a broker-dealer and an agent? ›
An agent, also known as a registered representative, stockbroker, account executive, financial consultant, and securities salesperson, is an employee of a broker-dealer, also known as a brokerage firm.
Which is better a broker or a dealer? ›
In conclusion, buying from a dealer or working with a broker depends on your individual needs and preferences. Here are some key points to consider when making your decision: A dealership might be your best bet if you value expertise, a wide vehicle selection, and the convenience of warranty and after-sales support.
How can brokers and dealers make money? ›
Broker primarily get paid via brokerage fees. Brokerage fees are charged for executing a trade. A broker will charge either a flat fee per transaction or will charge a fee based on a percentage of sales. Dealers, on the other hand, are executing trades for themselves and making money on the bid-ask spread.
How do broker owners make money? ›
How Does a Brokerage Firm Make Money? Generally, brokerages make money by charging various fees and commissions on transactions they facilitate and services they provide. The online broker who offers free stock trades receives fees for other services, plus fees from the exchanges.
