What Is a Broker-Dealer? Two Types, What They Do, and Regulation (2024)

For many investors, the financial services industry is a strange and mysterious place filled with a language all on its own. Terms like "alpha," "beta," and "Sharpe ratio" don’t exactly roll off the tongue, nor does their use by industry insiders serve to lift the veil and make things less opaque.

Of course, the language fits the medium, as the financial services arena is a complex world. To participate in that world, investors generally engage the services of a broker or dealer in some form or fashion, making a review of those terms an interesting place to begin exploring. Let's dive into the difference between brokers and dealers.

Key Takeaways

  • A broker executes orders on behalf of clients and can be either a full-service broker or a discount broker that only executes trades.
  • Meanwhile, a dealer facilitates trades on behalf of itself. Some dealers, also called primary dealers, also facilitate trades on behalf of the U.S. Federal Reserve to help implement monetary policy.
  • Broker-dealers are those that perform both responsibilities, such as traditional Wall Street organizations, as well as large commercial banks among others.


"Broker"and "dealer" are U.S. regulatory terms and, as is often the case with legal terms, they are not very intuitive to many people. While the words are often seen together, they actually represent two different entities. A broker executes orders on behalf of clients. To the regulators, this means the entity through which investors hold a brokerage account.

To investors, it generally means the person who helps them buy and sell securities. A bit of confusion occurs here, as the industry also has lots of terms for a person who helps investors buy and sell securities, including "financial advisor,""investment advisor," and "registered representative." For the moment, we’ll stick with the strict legal definitions to provide a baseline for further exploration.

Think of the legal entity that facilitates security trading as an agentacting on behalf of investors. When you want to buy or sell a security, the entity (in the case of online brokerage accounts for example) that helps you make that transaction is your agent. When you pay a commission to make a trade, you are making that payment to an agent. The terms "agent" and "broker" can be used interchangeably.

Full-Service vs. Discount Brokers

Brokers come in two general types: full service and discount. Full-service brokers provide one-on-one personal service. This includes providing specific investment recommendations in addition to planning and advice services that range fromretirement planning, long-term care planning, and estate planning to the formulation of a personal investment strategy that will help cover the cost of a child’s education, a home purchase, or other financial goals.

Ongoing assistance can include face-to-face meetings and periodic checkups to revisit progress toward goals. For novice investors or those too busy to plan for themselves, full-service brokers offer an array of useful services and information.

Discount brokers, on the other hand, provide trade execution. Online brokers are perhaps the best example of this arrangement, as investors can log on, select a security, and purchase it without ever speaking to another person. Discount brokers offer an inexpensive way to purchase securities for investors who know exactly what they want to buy.

Some of these firms also offer online tools and research designed to help do-it-yourself investors generate ideas and research securitiesthey may be interested in purchasing. The limited service offering provided by discount brokers is significantly less expensive thanthe cost of working with a full-service broker. Still, it's wise to clarify any misconceptions about discount brokers before hiring one.


While a broker facilitates security trades on behalf of investors, a dealer facilitates trades on behalf of itself. The terms “principal” and “dealer” can be used interchangeably. So, when you hear about big financial firms trading in their house accounts, they are acting as dealers.

Some of these dealers, known as primary dealers,also work closely with the U.S. Federal Reserve to help implement monetary policy. Primary dealers are obligated to participate in the auction of debt issued by the U.S. government. By bidding on Treasury bonds and other securities, these dealers facilitate trading by creating and maintaining liquid markets. They assist in the smooth functioning of domestic securities markets as well as transactions with foreign buyers.

Dealers' activates help to ensure the correct and smooth functioning of securities markets. They are regulated by the Financial Industry Regulatory Authority (FINRA), which is responsible for administering exams for investment professionals. Some of the better-known exams include Series 7, Series 6, and Series 63. The Series 7 permits financial services professionals to sell securities products, with the exception of commodities and futures.

In 2022, FINRA imposed fines of $54.5 million on brokerage firms.

The primary focus of the Series 7 exam is on investment risk, tax implications, equity and fixed-income securities, mutual funds, options, retirement plans, and working with investors to oversee their assets.

The Series 6 designation enables investment professionals to sell mutual funds, variable annuities, and variable life insurance. And the Series 63 enables them to sell any type of securities in a specific state. Obtaining these licenses is the first step financial services professionals need to taketo get into the securities business.

Putting It All Together

Most firms' investors would act as both brokers and dealers and are therefore referred to as broker-dealersby industry regulators. These firms include the primary dealers and other traditional Wall Street organizations, as well as large commercial banks, investment banks, and even small independent boutique firms that cater to the wealthy.

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.

The brokerage firm makes sure you have enough money in your account to conduct a trade, facilitates the trade by interacting with the stock exchange where the stock is traded, provides the computer systems that enact the trade, and keeps records of the trade. It also handles the financial transaction between the buyer and the seller and facilitates future transactions (dividends, stock splits, corporate actions such as those that occur when preferred securities are called or stock splits take place).

What Are Examples of Brokers-Dealers?

Some of the most well-known broker-dealers are Charles-Schwab, E-Trade, and Fidelity. Some of these, like Charles-Schwab, are full-scale financial services firms, while E-Trade is primarily an online brokerage firm. Other examples of broker-dealers include LPL Financial, Northwestern Mutual Investment Services, and Lincoln Financial Network.

What Is the Difference Between a Broker and a Dealer?

A broker is an individual or financial services company that enables the trading of securities for other individuals. A dealer is an individual or financial services company that enables the trading of securities for themselves.

How Does a Broker-Dealer Get Paid?

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. This involves buying a security and then selling it at a higher price.

The Bottom Line

With the depth and complexity of industry offerings and the ever-changing nature of the industry itself, knowledge is power. While there are pros and cons of partnering with a broker-dealer, the greater your grasp of the industry’s vocabulary, the better your starting point for understanding how the industry functions.

This includes developing a better sense of how your investments work, the services you get in exchange for the fees that you pay, who or what provides those services, and what you can expect should a dispute end up in court.

What Is a Broker-Dealer? Two Types, What They Do, and Regulation (2024)


What Is a Broker-Dealer? Two Types, What They Do, and Regulation? ›

A broker executes orders on behalf of clients and can be either a full-service broker or a discount broker that only executes trades. Meanwhile, a dealer facilitates trades on behalf of itself.

What is broker-dealer regulation? ›

Most "brokers" and "dealers" must register with the SEC and join a "self-regulatory organization," or SRO. This section covers the factors that determine whether a person is a broker or dealer. It also describes the types of brokers and dealers that do not have to register with the SEC.

What do brokers and dealers do? ›

A broker is any person engaged in the business of buying or selling securities for the account of others. A dealer is any person engaged in the business of buying or selling securities, but for their own account.

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 is broker regulation? ›

Brokers register with the Financial Industry Regulatory Authority (FINRA), the broker-dealers' self-regulatory body. In serving their clients, brokers are held to a standard of conduct based on the “suitability rule,” which requires there be reasonable grounds for recommending a specific product or investment.

Why are brokers regulated? ›

Regulation plays a pivotal role in the forex trading industry, ensuring transparency, security, and fair practices. For traders in Canada, the choice of a regulated forex broker is paramount to a secure and reliable trading experience.

How do I know if my broker is regulated? ›

Visit FINRA BrokerCheck or call FINRA at (800) 289-9999. Or, visit the SEC's Investment Adviser Public Disclosure (IAPD) website. Also, contact your state securities regulator. Check SEC Action Lookup tool for formal actions that the SEC has brought against individuals.

What does a dealer do? ›

A dealer acts as a principal in trading for its own account, as opposed to a broker who acts as an agent who executes orders on behalf of its clients. Dealers are important figures in the market. They make markets in securities, underwrite securities, and provide investment services to investors.

What do brokers do? ›

A broker is a person that facilitates transactions between traders, sellers, or buyers. Think of a broker as a middleman who ensures transactions can run smoothly and that each party has the necessary information. Brokers exist in many industries, including insurance, real estate, finance, and trade.

What is an example of a broker? ›

A broker's prime responsibility is to bring sellers and buyers together, and thus, a broker is the third-person facilitator between a buyer and a seller. An example would be a real estate broker who facilitates the sale of a property. Brokers can furnish market research and market data.

What is the difference between a broker-dealer and a dealer? ›

Brokers and dealers both provide useful financial information about investments to their clients but differ in how they operate. Brokers help clients buy and sell securities while overseeing their brokerage accounts, while dealers are individuals or firms that buy and sell securities for their own accounts.

What is the difference between an agency and a broker-dealer? ›

An agency broker is an intermediary that has a formal responsibility to act in the best interest of its clients alone. Unlike a broker-dealer or market maker, agency brokers do not hold inventory of the securities they buy and sell. Instead, they simply execute transactions on behalf of their clients.

How many broker dealers are there? ›

The number of brokerage firms that Finra oversees fell for the fourth-straight year in 2022 to a total of 3,378.

What happens when a broker is not regulated? ›

This is the most significant risk that unregulated brokers possess because they are not required to hold client funds in separate bank accounts from their operations. Unregulated brokers could not return client money anytime, even if it is outright fraud, and customers would have almost no legal recourse.

What if a broker is not regulated? ›

Although unregulated brokers are common, they are by no means illegal. The main thing you stand to lose is your access to recourse. While regulated brokers are not guaranteed to treat you well, they are open to legal scrutiny if they break rules.

How do you become a regulated broker? ›

Stockbrokers must register with the Financial Industry Regulatory Authority (FINRA). FINRA is a not-for-profit organization that's been authorized by Congress to regulate brokerage firms and stockbrokers—more than 624,000 individuals. To become a registered securities professional, you'll need to pass two exams.

What does it mean to be registered with a broker-dealer? ›

Registered financial professionals are licensed sales personnel who work for broker-dealer firms. Broker-dealers are in the business of buying and selling securities—stocks, bonds, mutual funds and certain other investment products—on behalf of their customers (as broker), for their own accounts (as dealer) or both.

Who regulates broker-dealers in the US? ›

FINRA FINANCIAL INDUSTRY REGULATORY AUTHORITY is authorized by Congress to protect America's investors by making sure the broker-dealer industry operates fairly and honestly.

How does FINRA regulate broker-dealers? ›

Working under the supervision of the Securities and Exchange Commission, we: Write and enforce rules governing the ethical activities of all registered broker-dealer firms and registered brokers in the U.S.; Examine firms for compliance with those rules; Foster market transparency; and.

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