How Does an Independent Broker-Dealer Work?

A broker-dealer usually cannot benefit financially from both sides of a buy-sell transaction.

Fremont, CA: Securities such as stocks, bonds, mutual funds, and other investments can be purchased and sold by an independent broker-dealer on behalf of clients. Investors who work with independent broker-dealers can benefit from their expertise, but they should understand how these arrangements work.

What Is a Broker-Dealer?

According to its name, a broker-dealer is either an individual or a firm that performs two functions. An individual or a company acts as a broker for their clients, assisting them with purchasing and selling securities. A broker connects buyers and sellers and collects a commission for their services. It's somewhat like matchmaking.

Broker-dealers participate in securities sales actively in dealer mode. Rather than trading for a client, they are trading for their own accounts. It is a broker-dealer's business to sell securities for a higher price than the price at which they were purchased. A broker-dealer usually cannot benefit financially from both sides of a buy-sell transaction.

It can be a small boutique operation or a larger brokerage firm that bears the broker-dealer label. Charles Schwab, Fidelity Investments, and TD Ameritrade are among the most well-known broker-dealer firms. The Securities and Exchange Act of 1934 regulates broker-dealers, and states may also regulate them. Under this act, broker-dealers are paid and allowed to engage in certain activities.

What Is an Independent Broker-Dealer?

Wirehouses and independent brokers-dealers can be divided into two categories. It is the investment offerings of wirehouses that distinguish them as the largest and most well-known brokerages. There is only one type of investment product sold by a wirehouse firm. Mutual funds, annuities, and other investments can be included in these products, but they are proprietary to the company that offers them.

The independent broker-dealer, on the other hand, offers investment products from other companies. Stocks, mutual funds, bonds, fixed income, annuities, and other investments are available to you regardless of which company you work with. Unlike full-service discount brokerage firms, independents can recommend more investment products to clients due to fewer restrictions.

Advantages of Working with an Independent Broker-Dealer

A broker-dealer that offers a wide range of investment options is one of the main advantages of working with them. Independent brokers-dealers may also offer alternative investments, such as hedge funds and commodities, in addition to stocks, mutual funds, and bonds.

To manage risk, you can diversify your portfolio. You can achieve your investment goals with a properly diversified portfolio without over or underexposing yourself to risk.