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A number of investors trade stocks and bonds through an investment broker. What is a broker? A broker, or brokerage firm, is the middleman between the buyer and seller and can help make a transaction go smoothly. But an investment broker is not strictly necessary. Some companies offer a direct stock plan, allowing investors to purchase shares straight from the company without a broker.

In order to decide if you need an investment broker, it’s essential to know how a broker works, what exactly they do, and how to shop around for one that fits your needs.

What Is an Investment Broker?

Investment brokers enable individuals to buy and sell financial securities, like stocks or bonds, on an exchange market. It’s really as simple as that. Though brokers do have several varying roles and responsibilities, and can offer a number of services to their clients.

Roles and Responsibilities

Reputable brokers act as a boon to both buyers and sellers: They ensure that each party actually has the money to buy assets or the assets to sell.

Brokers settle trades by delivering securities and payments to each party, while also taking care of all the bookkeeping and tax-related documentation required. In many cases, going through a brokerage firm may be the easiest and most accessible way for individuals to get started with investing.

Types of Brokerage Accounts

There are many kinds of brokerage accounts to choose from. For instance, you may want to choose between a brokerage account vs. a cash management account, both of which are offered by brokerages.

The best product or service for you will depend on your individual financial goals and your budget. Here’s what you need to know to help make an informed decision.

Full-service Brokers

Along with the ability to buy and sell assets, a full-service brokerage account might also include advice from human financial planners and portfolio management to help you make the best investment decisions possible.

However, these perks often don’t come cheap. Full-service brokerage accounts and wealth-management companies usually calculate their charges as a percentage of your total portfolio, and may have account minimums as high as $250,000. They may also collect trade commissions and annual management fees.

Discount Brokerages

Discount brokers offer less consultation and guidance, allowing you to DIY your investment portfolio cheaply. Many have $0 account minimums and may charge less than $10 per trade, or even offer commission-free assets trading.

Both full-service and discount brokerages typically offer both cash and margin accounts. In a cash account, you’ll need the actual cash to buy your assets. In contrast, in a margin account, the broker will lend you some capital to make purchases, using the securities you already own as collateral.

Online Brokers

Many investors today are likely familiar with online brokerages, as there are numerous platforms that allow users to buy and sell stocks or other securities. Many of them don’t charge commissions, either. Online brokers often offer the ability to buy or sell securities, and in some cases, trade derivatives, too.

Robo-Advisors

Robo-advisors aren’t really “brokerages” per se, but more of a service that may be provided by brokers. They’re effectively highly sophisticated robot brokers — they may conduct trades automatically for users or clients, rebalancing their portfolios or allocating their money based on the investor’s risk tolerance and other factors. Some brokerages offer robo-advisory services, and some do not. In some cases, there may be humans in the mix that help with portfolio curation, but it may be a good idea to explore the specifics depending on which broker you’re thinking of using to make sure.

Pros and Cons of Using an Investment Broker

As with any financial service, there are both benefits and drawbacks to using a brokerage firm to facilitate your trades.

Pros of Using a Broker

Some of the pros of using a broker include accessibility, simplicity, and expertise.

Accessibility

Thanks to the internet, you can open a brokerage account in minutes and start trading stocks as soon as your account is funded. That means employing a financial broker is one of the easiest ways to start an investment journey as quickly as possible.

Simplicity

When you buy and sell through a broker, a lot of the tedious footwork — like keeping tabs on your interest earnings for tax purposes — is taken care of for you. Depending on the type of brokerage firm you go with, you may also have access to professional financial advice and other advisory services that could help you make the most of your portfolio.

Expertise and Guidance

Brokers are professionals, and have experience in the market. That is, they may be able to offer a helping hand at times, which may be worthwhile to new or beginning investors who are still getting their sea legs.

Cons of Using a Broker

There can also be drawbacks to using a broker, such as fees and required minimums.

Fees and Commissions

Although they’ll vary based on the specifics you choose and the type of account you open, some brokers charge maintenance fees and trade fees — also known as commissions — which can eat away at your nest egg. In fact, the average stock broker commission charged by brokerage firms is usually 1% to 2% of the value of the total transaction.

That said, you can minimize your investment fees, or even eliminate them, by shopping around for brokers with the lowest costs. For example, many online brokers offer no commission trading.

Required Portfolio Minimums

Although it’s not true of every brokerage firm, some require you to keep a minimum amount of money in your account to use their services. These minimums might be $1,000 or more, which can be a barrier to entry for some beginner investors.

Potential Conflicts of Interest

It’s possible that a broker may have conflicts of interest, in that they may be a part of a broad organization or large company that has many clients. As such, they could have an interest in having investors invest in certain companies, assets, or more — and it may not even be intentional. The point is, it’s possible that these conflicts could exist, and investors should be aware of them.

How to Choose the Right Investment Broker

There’s no one way to choose the right investment broker, as it’ll largely depend on your specific needs and financial situation. That said, you can keep some general guidelines in mind when making a choice. That can include:

•  What your needs are (what are you looking to trade, specifically?)

•  What your financial goals are

•  Any fees or commissions that the broker may charge

•  Which specific products and services the broker offers

•  How easy they are to work with

•  How much guidance you want or need as an investor.

Different Types of Investment Accounts

Aside from deciding what type of brokerage you’d like to do business with (and how much you’re willing to pay for financial services), you’ll also need to decide what type of investment account works best for your goals.

Maybe you’re investing for a shorter-term objective, like purchasing a house, or perhaps you’re trying to ensure you’ll have a comfortable retirement. Either way, specific investment account types, or “vehicles,” are designed to help you get there.

Recommended: Understanding a Taxable Brokerage Account vs an IRA

Taxable Brokerage Account

Think of this as a default investment vehicle. It may be a good choice if you’re looking to grow wealth and want to be able to add or withdraw funds on your own terms without waiting to reach a certain age or life circumstance. However, you pay taxes on earnings, so there are no tax advantages to this type of account. If you don’t make any specific investment vehicle choices when you open your brokerage account, this is most likely the one you’re getting.

Individual Retirement Account (IRA)

An individual retirement account, or IRA, is a type of investment account designed specifically for retirement goals and is available to self-employed people and those working for a company. IRAs carry specific tax incentives; for example, contributions to traditional IRAs are deductible. While Roth IRAs allow for tax-free distributions. However, you can’t access the funds without paying a penalty until you reach age 59 ½ or meet certain circumstantial requirements, such as purchasing your first home.

Roth IRA

Roth IRAs are similar to traditional IRAs, with the key difference being that contributions are made with after-tax dollars, meaning that the money in them can be withdrawn tax-free. As such, there may be some advantages for investors to use a Roth IRA versus a traditional IRA, though it may be best to confer with a financial professional to get a sense of which may be a better investment vehicle given your situation.

401(k) Accounts

There are also 401(k) accounts, which are employer-sponsored retirement plans that are similar to IRAs, in some ways. Employees can contribute a portion of their paychecks to a 401(k), and some employers will even match their contributions up to a certain percentage. There may be tax advantages, too.

Regulations for Investment Brokers

Investment brokers need to abide by some rules, most notably, those set forth by regulators like the Securities and Exchange Commission (SEC), and FINRA.

FINRA and SEC Oversight

Investment brokers are regulated by the Financial Industry Regulatory Authority (FINRA). Brokers must register with FINRA, and they are required to follow a standard of conduct known as the suitability rule. Under this rule, brokers need to have suitable grounds for recommending particular investments to clients.
Brokers also need to register with the SEC, which oversees regulatory efforts for the industry.

Fiduciary Responsibility

Brokers also have a fiduciary responsibility, which means they are required to act in their client’s best interest. So, if a broker can talk a client into buying a bunch of assets, which may be to their detriment, while raking in commission fees, they could find themselves in trouble.

Alternatives to Investing With a Broker

Although using a broker to invest in the stock market might be a smart money move for some, there are other ways to get started with investing, including the following options.

Recommended: Buying Stocks Without a Broker

Automated Investing

Automated investment products, or robo-advisors, are platforms that utilize a combination of computer algorithms and human financial planners to create and manage diversified portfolios at low costs to users.

Your funds will be invested in a diversified portfolio, and the platform typically offers goal-planning tools and rebalancing services to help keep your funds moving in the right direction.

If you don’t want to pay the high prices for a full-service broker, but self-managing your portfolio makes you more than a little nervous, a robo-advisor may be right for you.

Buying Stocks and Fractional Shares Directly

Depending on whose stocks you’re interested in purchasing, you may be able to buy them directly from the issuer without needing to go through a brokerage firm.

It pays to read the fine print, however: Buying stocks directly may save you money on trade commissions, but you may also be subject to proprietary fees from the company or minimum purchase amounts. And if you’re buying fractional shares (fractions of shares of stock), you need to have an investment account, such as one with an online broker or robo-adviser.

Diversifying your assets can still be helpful for investors who buy stocks directly. If all of your investments are tied up in a single company, you may not be in a great position if that company begins to falter. In contrast, if you’ve invested in several different firms and other asset classes, you will likely have a wider margin for error.

Choosing Alternative Investments

Although the stock market is one of the most popular ways to invest, there are plenty of other ways to try turning your money into more money.

You might consider exploring alternative investments. For example, you could invest in real estate and sell the property at a profit or turn a condo into a passive income source by putting it up for rent. Or you might invest in art; the value of paintings is not necessarily correlated with the behavior of the stock market, giving it the potential to rise even during a stock market crash.

That said, many alternative investments require significantly more time, work, and know-how than crafting a diversified portfolio of stock market assets. And as always, every investment involves risk. There’s no such thing as a sure thing.

Direct Stock Purchase Plans (DSPPs)

Further, investors can check out whether they can participate in a direct stock purchase plan, or DSPP, which allows investors to buy stock directly from the stock-issuing entity. This way, investors don’t need to deal with a broker at all, they can go directly to the source and purchase stock.

The Future of Investment Brokerage

What does the future hold for investment brokers? Nobody knows for sure, but it’s likely that the entire field will evolve in the coming years, as much of the financial space has. Technology keeps evolving and rapidly changing, and the introduction of artificial intelligence and perhaps, in the future, quantum computing capabilities, may give investors new abilities that were unimaginable a few years ago.

We’re not sure exactly what that will look like, but it’s likely a safe bet that the field will continue to see rapid change

The Takeaway

If you’ve decided stock market investments are the right move for you and your money, going through a broker can be a relatively simple and low-cost way to gain access to the market. However, if you’d rather avoid potential downsides, like fees or required account minimums, you may want to consider the option to invest directly. The choice is yours.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What is the role of a stock broker?

A stock broker is a financial professional who buys and sells stocks on behalf of clients. A broker generally earns a fee or commission for their services.

How do brokers make money?

Brokers typically work on commission. The average stock broker commission is usually 1% to 2% of the value of the total transaction.

Why do people use brokers?

People use brokers to help them buy and sell stocks and bonds. For many individuals, using a broker is the easiest way to start investing.

How much money do I need to start investing with a broker?

How much you need to start investing with a broker depends on the specific broker or brokerage. Some may not have minimum amounts, while others may have relatively large or high balance requirements.

Are online brokers safe to use?

While there’s no guarantees in the financial world, and there’s certainly nothing that’s “safe,” most brokers are relatively low-risk, so long as they abide by regulatory standards and are registered with the proper authorities. That said, it may be a good idea to do some research before signing up.

Can I switch brokers easily if I’m not satisfied?

Yes, you can open up new or different brokerage accounts with other brokers.

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