What is a Broker-Dealer?
A broker-dealer is a financial intermediary that can act in two capacities: as a broker when executing orders on behalf of clients, and as a dealer when trading for its own account. Broker-dealers are regulated by the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).
Broker vs. Dealer Functions
Broker Role:
- Executes buy and sell orders for clients
- Earns commissions on transactions
- Acts as an agent for the customer
Dealer Role:
- Trades securities from its own inventory
- Makes markets in securities
- Earns profits from the spread between bid and ask prices
Types of Broker-Dealers
- Wirehouse Firms: Large, full-service firms (e.g., Morgan Stanley, Merrill Lynch)
- Regional Broker-Dealers: Serve specific geographic areas
- Independent Broker-Dealers: Support independent financial advisors
- Discount Brokers: Offer reduced commissions with limited advice
- Online Brokers: Digital-first platforms
Broker-Dealer vs. RIA
| Aspect | Broker-Dealer | RIA |
|---|---|---|
| Standard | Suitability | Fiduciary |
| Compensation | Commissions | Fees |
| Regulation | FINRA/SEC | SEC/State |
| Products | Proprietary allowed | Best interest required |
Dual Registration
Many financial professionals are dually registered, holding both broker-dealer and investment adviser registrations, allowing them to offer both commission-based products and fee-based advisory services.
