Answering what is a broker can seem very simple, but often little is understood about it.
A broker is an intermediary- a person or a company- that acts a mid agent between buyers and sellers.
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Brokers exist in wealth management, as well as any other market.
Brokers are typically paid on a commission basis, which is usually a percentage of the customer’s purchase or a sale price. In other cases, the broker receives a flat fee per transaction or a combination of both.
What is a broker and why it matters
Brokers matter because they create a more competitive marketplace and bring together buyers and sellers. As a result, they improve the efficiency of the market and generate greater liquidity to it.
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By GlobalDataHowever, the existence of brokers means that commissions reduce returns. This means that investors should find a broker where the fees justify the level of services received.
Previously only the wealthy could afford to hire a broker to access the stock market. However, access to the internet has changed this. Now we have discount brokers, which allow investors to trade at a lower cost, but do not offer personalised service.
The prevalence of discount brokers has made it possible for anybody to invest in the stock market.
Robo-advisers which have been revolutionising wealth management, also in some cases use brokers to access the stock market.
Discount brokers can execute any type of trade for their client, and they usually charge lower commission fees. This can typically be priced at any level between $5-15.
So brokers matter mainly because they provide access to stock markets, which typically would have been too expensive to do so without them. Brokers also foster greater competition in markets, tightening spreads between ask and bid prices.
The downside to using brokers is cost, but the internet has mostly rectified this problem, and opened up several cost-effective options.
