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What Is a Broker?

broker

A broker is a person that facilitates transactions between traders, sellers, or buyers. Think of a broker as a middleman who ensures that the transaction can run smoothly and that each party has the necessary information. Brokers exist in many industries, including insurance, real estate, finance, and trade.

But what does a broker do, exactly? It’s a little different depending on the industry. In this guide, we’ll go over:

Types of Brokers and What They Do

Business Broker

A business broker helps clients buy or sell businesses. Typically, business brokers only work on selling and purchasing companies worth less than $1 million, while merger and acquisition (M&A) managers and investment bankers handle sales of larger businesses.

Business brokers have similar responsibilities as M&A managers and investment bankers, though. Determining the value of the business, pitching the sale to potential buyers, and assisting in negotiations are all essential parts of a business broker’s job. Additionally, business brokers play a crucial role in ensuring the sale is kept confidential and allowing the business owner to keep their focus on running their company.

You can start building the skills needed for business brokerage by taking Forage’s Mergers & Acquisitions Virtual Experience Program in partnership with Latham & Watkins LLP.

Customs Broker

Customs brokers ensure that imports and exports are conducted in a way that meets federal regulatory standards. Working directly with the importer or exporter, customs brokers relay pertinent information and payments to the U.S. Customs and Border Patrol. A customs broker also provides information to importers and exporters to better understand what the requirements are and what clearances may be required.

Data Broker

Also known as information brokers, data brokers are individuals or companies that collect data from various sources. Data brokers then sell or license the data to third parties, like advertising companies.

Using sources like social media and public records, data brokers gather details about people, like names, addresses, phone numbers, incomes, and occupations. These details are crucial to advertising companies as they can increase the efficacy of targeted campaigns. However, other industries use data brokers, too. For example, a bank may utilize a data broker to look into a loan applicant and determine if the information is correct. Even your employer might have used a data broker if they ran a background check to determine your employment eligibility!

Insurance Broker

Insurance brokers work with their clients to find the right policy for the clients’ individual needs. Because they are not tied to a specific insurance provider, insurance brokers can sell policies from various insurance companies. As a result, insurance brokers may offer a variety of insurance products ranging from personal auto coverage or life insurance to commercial policies.

Mortgage Broker

Mortgage brokers assist hopeful homebuyers with finding a mortgage loan. They can help homebuyers find the best rates and terms for their mortgages. Additionally, as an intermediary between lenders and borrowers, mortgage brokers organize and gather the necessary paperwork from borrowers.  They then ensure it is correctly relayed to the lender.

Unlike mortgage bankers, mortgage brokers do not lend money – instead, they connect borrowers and lenders and facilitate the transaction. Mortgage brokers can be independent, or they may work as part of a mortgage brokerage firm, and they typically earn money through commissions or origination fees on the mortgage itself.

Real Estate Broker

A real estate broker works for either a real estate buyer or seller to negotiate the sales and manage the documentation involved in closing real estate transactions.

“With their sellers or buyers, brokers find a buyer or home for sale, respectively, and draw up contracts for the impending transaction,” says Matt Woods, co-founder and CEO of real estate brokerage SOLD.com. “They show and list homes, facilitate inspections and appraisals and negotiate sale contingencies.”

Real estate brokers are sometimes confused with real estate agents. However, real estate brokers are agents who have had experience in real estate and have passed a broker licensing exam. Having a broker license allows real estate brokers to run a firm with agents working under them.

Stockbroker

Stockbrokers are financial entities that trade securities (tradeable assets such as bonds, stocks, or options) for clients. Stockbrokers can provide services like financial advisement and investment management, in addition to their role as the facilitator for purchasing and selling securities.

There are a few different types of stockbrokers, though, and each has its advantages and limitations. For example, discount stockbrokers manage trades and take a low commission on the deal, but they cannot provide financial or investment advice due to having different licensing and registration.

However, full-service brokers, or advisory brokers, can provide insight to their clients on when and where to trade, but they take higher fees because of their advice. On the other hand, a discretionary stockbroker can choose and make trades without consulting the client, but their asset management typically includes a heftier price tag.

You can start building your asset management skills using Forage’s Investment Management Virtual Experience Program in partnership with Fidelity International.

Why People Hire Brokers

People likely need a broker if they want to purchase or sell something big and expensive, like a property or a business. Having this go-between can be beneficial for various reasons. Brokers have better access to information in their industry than the average person. They know what documents must be filed and how to do it efficiently. Additionally, for buyers and sellers alike, brokers can utilize their connections to find the best deal.

How Brokers Make Money

There are a few different ways that brokers make money. The most common methods are commission, advisory fees, and mark-up fees (also called spreads). Commissions are a percentage of the overall sale. For example, if a real estate broker sells a house valued at $200,000, they may take a 5% to 6% commission on that sale equalling $10,000 to $12,000. That commission is on top of the sale price, and it is usually the seller who is responsible for paying it.

Some brokers charge fees instead, typically for offering advice or for doing a service. For example, stockbrokers licensed as financial advisers will often charge their clients fees for helping them decide which stocks to trade. But stockbrokers also can make money from spreads – they mark up the value of the security and take the difference as profit.

According to the Bureau of Labor Statistics, brokers working in securities and financial investments see a median salary exceeding $60,000, with the highest 10% earning more than $200,000 per year. Real estate brokers also see median salaries over $60,000, and the highest-paid brokers make six figures!

How to Become a Broker

Education Requirements

Becoming a broker requires at least a high-school diploma or GED, though certain industries prefer applicants with Bachelor’s degrees. Especially for becoming a stockbroker or business broker, a finance degree can help you learn many of the skills you need to succeed. Also, working in the industry for a little while can be helpful. In fact, most states require real estate brokers to have a few years of experience as licensed real estate agents before they can pass their real estate broker licensing exam.

Licensing Requirements

Brokers typically need specific licensing and certifications regulated at state and federal levels.

For instance, “becoming a mortgage broker requires passing a state-licensed exam,” Melody Villasana, mortgage broker and owner of Home Charm Realty, says. “After completing the required education, both pre-license and on-the-job training, individuals seeking to become licensed mortgage brokers must pass the Nationwide Mortgage Licensing System (NMLS) exam.”

Similarly, insurance brokers have strict licensing requirements and must maintain their registration with their state. Stockbrokers have federal regulations they need to follow, though. The most important requirement for stockbrokers is being licensed by the Financial Industry Regulatory Authority (FINRA), which involves passing a series of exams that prove they understand the laws surrounding financial trading and advisement and have the skills to do the job.

Necessary Skills

Brokers of all types must show a strong mix of hard and soft skills. Often through licensing courses and on-the-job training, brokers learn the hard skills needed to do their job well. These skills include being able to use sales platforms and understanding specific documents they’ll use in their job.

But brokers also need soft skills. Brokerage, regardless of the specific industry, is a client-facing role. So being able to communicate with people, having good people skills, and having the initiative to seek out new customers are all vital to being a great broker.

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