How to Understand Your Financial Broker's Role

Brokers on the floor of the New York Stock Exchange, 1908

A financial broker is a professional who acts as an intermediary between buyers and sellers of financial instruments. Traditionally, brokers deal with securities such as stocks, bonds, and mutual funds.

Brokers can provide a variety of services to their clients, including:

• Buying and selling Securities/ Derivatives/ Currencies/ Commodities/ Cryptocurrencies

• Providing investment advice

• Managing portfolios

• Conducting research

If the New York Stock Exchange image made you think that a broker is someone who works for you for free, you're way off base.

Nobody works for free...

A broker is not a charitable organization.

His primary objective is to generate profit for himself and the company he represents.

This, in itself, is not wrong: everyone needs to earn. The problem arises when this desire for profit clashes with the customer's interest. It's up to us to understand our own risk tolerance and how much we're willing to pay to secure a favorable outcome from their business plan.

So we have:

Full-service brokers cater to high-net-worth individuals and businesses that require comprehensive financial solutions. Their services go beyond just executing trades and include personalized advice, portfolio management, and access to exclusive investment opportunities. However, this level of service comes at a cost, as full-service brokers typically charge higher fees compared to discount brokers or online platforms.

Online and low-cost brokers cater to self-directed investors who are comfortable managing their own investments and do not require personalized advice or a wide range of financial services. Their platforms are designed to be user-friendly and efficient, allowing clients to easily access market data, research tools, and execute trades. However, they typically do not offer services such as financial planning, wealth management, or tax advice.

Brokers (near) 0 Fees has undergone a significant transformation, with commission-free trading now prevalent for stocks, ETFs, and options on most online platforms. This fee compression is a direct consequence of heightened competition. As a result, brokers have adopted alternative revenue models, including margin lending, securities lending, premium service offerings, account fees, and the sale of order flow to market makers.

Easy money? Beware of brokers

"There is no such thing as a good broker or a bad broker; both try to make money and have a conflict of interest with you.

There is a broker with a high-risk profile and a broker with a low-risk profile.

Transparent and non-transparent brokers.

Brokers listed on financial markets exchanges and brokers in Cyprus and Malta or exotic locations."

• https://www.kalzumeus.com/2019/6/26/how-brokerages-make-money/

• Investor Compensation scheme: https://eur-lex.europa.eu/EN/legal-content/summary/protecting-investors-when-an-investment-firm-fails.html

• Securities Lending: https://www.ecb.europa.eu/ecb-and-you/explainers/tell-me-more/html/securities_lending.en.html#:~:text=In%20return%2C%20the%20borrower%20transfers,and%20pays%20a%20borrowing%20fee.

• Bid / Ask Spread: https://www.investopedia.com/terms/b/bid-and-ask.asp

• Payment for Order Flow PFOF: https://www.investopedia.com/terms/p/paymentoforderflow.asp

• SEC and PFOF: https://www.investopedia.com/sec-considers-banning-payment-for-order-flow-5199447