What Is an Agency Broker?
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. An agency broker would be tasked to find the best possible execution when filling a large order. The clients of agency brokers are typically large institutional investors.
In the context of real estate and insurance sales, an agency broker may instead refer to an individual who works for a specific firm (agency) and is only allowed to sell their listings or products, which may also be known as a captive agent.
Key Takeaways
- An agency broker is a broker that only acts on behalf of their clients to execute client trades.
- Unlike a broker-dealer, agency brokers do not hold inventory in the securities they buy and sell.
- Agency brokers are typically used by large customers and institutional traders.
- Their relatively high fees make them uneconomical for most retail investors.
Understanding Agency Brokers
Agency brokers act as an intermediary between their clients and the exchanges through which they trade. Their responsibility is to act on behalf of their clients in securing the best possible terms for their trades. By contrast, broker-dealers buy and sell securities to and from their clients in order to generate profit for themselves. Because of this crucial distinction, it is important to understand whether a particular broker is acting in an agency capacity or as a dealer.
Agency brokers are typically relied upon by larger clients, such as investment funds, corporate finance departments, family offices, and high net-worth individuals. These clients have unique needs which differ from regular investors. For instance, purchasing large blocks of shares often requires more expertise in the execution of the trades, in order to avoid inadvertently affecting the price of the shares before the position has been established. Similarly, large clients may have unique tax considerations that affect the timing or execution of their transactions.
Agency brokers can also help large clients by providing some degree of anonymity behind their purchases and sales. For example, if a large investment firm begins purchasing shares in a particular company, the news of that purchase might trigger more public interest in the stock. This new interest from the public could potentially drive up the share price and cause the investment firm's share purchases to become more expensive. For this reason, the firm might prefer executing its purchases through one or more agency brokers so that the purchase is less readily visible to other firms.
Agency brokers that arrange large trades between one or more financial institutions are known as inter-dealer brokers (IDBs).
Special Considerations
Although agency brokers can clearly offer important benefits to their clients, their expertise does come at a cost. Like doctors and lawyers, agency brokers require years of training and experience to develop their specialized skills. Unsurprisingly, their fees are correspondingly high. For most investors, agency brokers are likely to be an uneconomical option due to their relatively high cost.
Because agency brokers are financial professionals who charge high commissions, most retail investors (i.e., ordinary individuals) will instead use the more affordable services of a discount or online broker.
Example of an Agency Broker
Say that Charlie is the manager of a large corporation that regularly invests in publicly traded stock. One of the companies he has been analyzing is XYZ Industrial, a manufacturing company that Charlie has long admired.
Recently, XYZ has fallen prey to a news scandal that has significantly depressed its stock price. In light of this, Charlie feels that the company's shares are now undervalued by the market. An avid value investor, Charlie decides to capitalize on this opportunity by purchasing a large block of XYZ's shares.
In doing so, Charlie contacts his agency broker and asks them to purchase the shares as efficiently as possible. What this means in practice is that the agency broker must carefully time the share purchases so that they can obtain the lowest possible price on behalf of their client.
If the broker were to place the entire trade in a short period of time, this would likely cause the share price to rise, causing the remainder of the share purchases to become more expensive. If on the other hand, the agency broker waits too long before completing the purchase, the opportunity to buy XYZ at a relatively low price may cease to exist. Because of their expertise in navigating these complexities, Charlie is content to pay the agency broker's fees.
FAQs
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.
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.
How does the broker system work? ›
A brokerage firm acts as an intermediary who makes matches between buyers and sellers of stocks, bonds, and other financial assets. A full-service broker is a broker that provides a large variety of services to its clients including research and advice, retirement planning, and more.
What does it mean to work as a broker? ›
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 an agency trade? ›
For example, if your transaction request to your stockbroker is for a sell order at a certain price, the stockbroker will seek a transaction request for a buy order at that price. Once both of these parties are found and the transaction is concluded, it is documented as an agency trade on the appropriate exchange.
What an agent broker is and how they are paid? ›
Most real estate agents make money through commissions that are based on a percentage of a property's selling price, (Commission can also be flat fees, but that is much less common.) Agents work under real estate brokers, and the commissions are paid directly to the brokers.
How does a broker make money? ›
Brokers make money from buying and selling market investments, including mutual funds. Attention, all day traders and long-term investors, brokerage account fees are important to understand for one reason: Fees can impact your investment returns.
Why would someone use a broker? ›
A broker will be able to offer you practically the entire finance market. If you want a home loan, a quality broker can identify the most appropriate loan for you, normally from over 30 lenders. A banker can offer one set of products from their own bank, nothing else.
What are the two most common types of brokers? ›
Brokers come in two general types: full service and discount.
How long do brokers work? ›
Some stock brokers work 12-hour days, while others work regular business hours, starting early in the day.
Full-service brokers and financial advisors manage brokerage accounts for you. With managed accounts, you typically get advice about other aspects of your financial life, such as estate and retirement planning.
What makes a successful broker? ›
Successful brokers are excellent communicators, actively listening to their client's needs and negotiating skillfully to secure the best deals. They leverage real estate finance, technology, and their network to enhance client satisfaction.
What does a broker do in a day? ›
A stock broker's day is all about trading. They start off the day researching and contacting their network of clients to discuss their portfolios before making any moves. They make plans for what to buy and sell.
How to act as a broker? ›
working as a broker
- analyzing clients' requirements: You identify potential clients for your employer. ...
- looking for buyers: Some clients hire you to find potential buyers for their assets or goods. ...
- negotiating offers: When you broker a deal, you must bring both parties to the negotiation table to discuss the offer.
Steps to becoming a mortgage broker
- Sign-up to the MFAA. It's free to sign-up and access some of our membership benefits. ...
- Get qualified. ...
- Choose an aggregator. ...
- Choose a mentor. ...
- Key requirements. ...
- Apply for membership.
Because of this, the commission usually goes to the broker, who then pays the agent their share. The amount of commission can vary depending on the agent. The commission split between a newer agent and a broker tends to be 50/50. More experienced agents may receive anywhere between 70/30 or 80/20 in a commission split.
How do agency traders make money? ›
The other model, agency trading, is substantially different to proprietary trading. Agency traders act only on explicit instruction from a client and only generate revenue (commissions) when a client's order is traded in a market.
What is the difference between an agency and a brokerage? ›
Agents always represent insurers. On the other hand, brokers represent consumers. While agents focus on selling insurance policies, brokers focus on finding policies that meet customers' needs and requirements.
Do brokers make money from agents? ›
Brokers earn a percentage of the commission earned by the agents they sponsor or 100% of the commission from their own deals. Learn more about being a real estate agent and get exclusive offers!
