What Is a Broker-Dealer?
A broker-dealer firm buys and sells securities for clients but also executes trades for its own benefit. In other words, it is a broker when it trades for clients, and it is a dealer when it buys and sells for itself.
In the United States, the regulatory term “broker-dealer” can describe an individual or a firm (a general partnership, a limited partnership, limited liability company, corporation, or other entity). Many broker-dealers are online platforms. A broker-dealer conducts the business of buying and selling securities by filling one of two roles in a transaction.
A broker-dealer performs two roles. It is both a broker, when it trades for a client and charges a commission, and a dealer, when it trades for itself.
If the broker acts as an agent, the broker-dealer takes the action required to trade a security. The broker does not have any of their own money at risk but connects their client with other broker-dealers for which they are paid a commission.
If the broker-dealer acts as a dealer, they are a principal in a transaction. In this case, the broker-dealer is buying or selling a security from or for a customer. In this case, the broker-dealer must disclose, in writing, that they are acting as a dealer and explain all charges and compensation. These brokers are also called market makers.
- A broker-dealer firm buys and sells securities for clients and for itself.
- There are two types of broker-dealers. A wirehouse sells its own products, whereas an independent broker-dealer sells products from outside sources.
- If a broker-dealer has significant assets-under-management, it is usually a positive sign in terms of their expertise.
- When choosing a broker-dealer, an investor should consider many factors such as their fees, their assets-under-management (AUM), how much personal attention they provide, and their status with the Financial Regulatory Authority (FINRA).
There are two types of broker-dealers. One type is a wirehouse or a firm that sells its own products to customers. The other type is an independent broker-dealer that sells products from outside sources. There are more than 3,600 broker-dealers from which to choose, according to the most recent data from the Financial Industry Regulatory Authority (FINRA). The purpose of ranking the top 15 broker-dealer firms is to provide a reference for the most established and stable companies in this field.
It is nearly impossible for an individual to research each individual broker-dealer given the vast numbers that exist. You must narrow your focus. One way to do that is to begin by looking at broker-dealers that attract a lot of money from clients or have the most assets under management (AUM). Significant AUM can be an indication that a broker-dealer has performed well.
Below is a list of the top 15 broker-dealer firms based on AUM numbers available from the companies as of October 25, 2018. We avoided ranking broker-dealers by the number of advisors in the firm because this figure does not reveal how much money the firm handles. For those who want to play it safe and use a broker that has a significant presence, this list is a good starting point.
|Top 15 Broker-Dealers 2018 by Assets Under Management|
|Fidelity Investments||$6.85 trillion|
|Charles Schwab||$1.85 trillion|
|Wells Fargo Advisors||$1.6 trillion|
|TD Ameritrade||$1.3 trillion|
|Edward Jones||$1.10 trillion|
|Raymond James Financial||$754 billion|
|AXA Advisors||$665 billion|
|LPL Financial||$669 billion|
|Ameriprise Financial||$485 billion|
|Commonwealth Financial Network||$156 billion|
|Northwest Mutual Inv. Services||$132 billion|
|Cambridge Investment Research||$99 billion|
|Securities America||$86 billion|
|Waddell & Reed||$80.2 billion|
Choosing a Broker-Dealer
Please note that it is not wise to choose a broker-dealer based on AUM alone. Other factors, such as a track record of significant returns for clients, should be considered.
Another consideration when selecting a large broker-dealer is personal attention. Large firms can have many advisors working for them. Make sure you select an individual advisor who has time to examine your financial needs in detail, return calls promptly, and suggest investments that are suited to your goals.
The number of broker-dealers in the United States, according to the most recent data from the Financial Industry Regulatory Authority (FINRA).
In addition, you should always check the status of a broker-dealer with FINRA. This organization is the watchdog for broker-dealers, and it regularly investigates broker-dealers and documents misbehavior. FINRA may also fine companies that misbehave. To be safe, be sure to check the FINRA’s BrokerCheck website to find out if a firm you are interested in has made any missteps.