What Is the Role of a Broker in the Financial Market?

At its core, the role of the stock broker and brokerage firm is to execute the demands of their client. At most, a full-service brokerage will offer analysis and participate in shaping a financial plan. After the profession took on a negative image in the 1980s and ’90s, stock brokers have come to prefer calling themselves “investment counselors” or “financial advisers,” but the job is essentially the same.


Only registered brokers can initiate transactions on the floors of the major stock exchanges and other financial markets. Thus, the primary function of the broker is to provide access to the investor. The full-service brokerages of the past have not disappeared, but the advent of electronic trading has allowed the vast majority of retail investors to route their orders, through the platform of their discount broker, directly to the exchange. Because of their experience and expertise, stock brokers are still in a position to give investment advice to those who are paying for the full-service experience, and some may even be given permission by their clients to act on their behalf at the broker’s own discretion.


Individual stock brokers develop their own clients and contacts, even if they work as part of larger or smaller brokerage firms. Familiarity with a client’s portfolio, goals and risk tolerance allows for a smooth relationship. Of course, the fees for this priority treatment are much higher than many people are willing to pay. Thus, discount brokerage firms have filled the niche of low-commission, execution-only brokers that was created by the explosion of the Internet and electronic trading.


Whether an investor chooses to make her own investment decisions and execute them through a discount broker, or prefers to capitalize on the expertise of a reputable firm in designing a financial strategy to meet her needs, the ability to participate in financial markets is the single greatest benefit provided by stock brokers. Along the way, brokers, as financial intermediaries, will conduct and oversee each transaction–from placement and execution to clearance–advise on potential violations of SEC regulations and provide liquidity to investors through margin accounts.


Many small- to medium-sized investors increasingly choose to manage their own money and forgo the cost of full-service brokerage–but this decision should be balanced by a working knowledge of markets and a balanced temperament throughout the potentially high-stress rigors of money management. If a full-service broker is used, the personal relationship between the parties is crucial. Not only should a client consider the broker’s track record and the recommendations of other clients, but he must also be explicit about his goals and expectations and the authority he grants the broker.


As commerce increasingly goes global and the interconnectedness of the world’s financial systems is repeatedly demonstrated, one of the most important functions of the broker will be to provide access to emerging markets, analysis of potential investment opportunities and knowledge of the appropriate regulations. All of this information is less likely to be familiar or available to individual retail investors, so relying on the broker to help develop these prospects is likely to remain a crucial element of the client-broker relationship.