A Career as a Stock Broker

What is a Stock BrokerWhat is a Stock Broker?

A stock broker is a financial professional that buys and sells stocks or closely- related securities for retail customers. Stock brokers often work for a firm called a broker-dealer that has a seat on an exchange such as the New York Stock Exchange. The term ‘stock broker’ is a bit outdated, with an unsophisticated connotation attached to it. It typically refers to a licensed professional who advises and facilitates trading in a client’s brokerage account and is paid a commission per transaction.

The term stock broker was more in use in the 1980s and 1990s when trading commissions were very high. It wasn’t uncommon for these commissions to be in the hundreds, or even thousands of dollars for a round trip (buy and sell) transaction back in the 1980s.1 As you can imagine, that introduces an inherent conflict of interest.

Bad Actors

This “fast money” soon brought with it an unsavory brand of ‘professionals’ into the business. Their escapades are portrayed in movies like ‘Boiler Room’ and ‘The Wolf of Wall Street. Many brokers were accused of churning their customer’s accounts. Churning is excessive trading of a customer account for the purpose of generating commissions for the broker. This practice, unethical and illegal, can lead a broker to be fined, put on probation, incarcerated and/or made to pay restitution to the victim.2 Back then, the concept of the ‘fiduciary’ was quite new and undefined.

Over time, technology and regulation corrected the problem. Competition from online discount brokers like Ameritrade and E-Trade really crushed the commission business, starting around the late 1990’s. Also, decimalization of stock quotes compressed the bid-ask spreads for trading, further reducing costs to the public. Finally, a crackdown by regulators including Elliot Spitzer against certain Wall Street practices forced still more positive changes for customers. The era of high commissions was over.

Stock Brokers Today

With commission rates so low and bid-ask spreads so tight, the message from the financial industry pivoted to the ‘buy and hold’ strategy we see today by most financial advisors and asset managers. Today, the financial industry had adopted the fee-only compensation model, based on the amount of assets under management in a customer’s account. This fee, commonly referred to as a “wrap-fee” fits perfectly with the emphasis on retirement planning for the Baby Boomer generation we see today. A couple decades ago, the focus was much more on generating short-term profits for clients.

Most stock brokers are now referred to as financial planners, reflecting the broader level of service they provide. Another distinction is the relationship between the broker and client. There is a major effort being put forward by the Department of Labor regarding just this matter. Lawmakers have been trying to increase a financial advisor’s accountability making them a true “fiduciary” for their clients. This means that all investment advice and recommendations must be done with the client’s interests above the advisors.

This sounds like common sense but is a major change. Prior, advisors were simply held to the ‘suitability’ standard for investment advice.3 Being designated a fiduciary increases the responsibility for the advisor as well as the potential for liability in case of breach of this standard. In the wake of the dotcom crash as well as the financial crisis, this is another safeguard put in place for investors. And with $74 trillion in global assets under management, regulators want to make sure that the industry remains vigilant in protecting the financial system through increased risk management.4

How do I Become a Stock Broker?

To become a stock broker or financial advisor, the professional must obtain a license to sell securities to the public. While there has been an explosion in the number of licenses (as well as professional designations) that are now available, the basic one required to sell stock to the public is the General Securities Representative Exam, better known as the “Series 7” (there may be an additional state-specific license regarding Blue Sky laws).5 Passing the Series 7 is also typically required for any trader who handles public order flow.

Before you decide to go out and try your hand at the Series 7 exam, there is one major stipulation-you must be ‘sponsored’ by a FINRA member-firm. This adds another layer of protection to the public. But there is one loop-hole. You may be able to still take the exam if you are part of a self-regulatory organization or SRO.6

An SRO is a quasi-regulated organization that still exercises some regulation over an industry. The financial services industry is highly regulated while other financial-related areas such as the real estate transactions are less so. For example, real estate agents obtain their license from the National Association of Realtors, an SRO. Frankly speaking, you want to get sponsored by a FINRA organization (Financial Industry Regulatory Authority) from the start, because this will attract more clients over time because of the trust factor.

Selling Insurance Products

Given the current low interest rate environment, there is high demand for investment products that provide adequate income throughout retirement. Many stock brokers and financial advisors are turning to insurance products such as annuities for their clients, to complement other retirement income such as pensions and Social Security. These products can be designed to address ‘longevity risk’ for customers- the problem of outliving your money.

But certain types of insurance products, such as variable annuities and variable rate life insurance, require an additional license for brokers, the ‘Series 6’.7 With such demand for these insurance products, many financial advisors are becoming dual-licensed to sell both financial securities (stocks, bonds, etc.) and insurance products to better meet the comprehensive needs of their clients.

Online Masters in Finance Degrees

While the initial requirements to become a stock broker are relatively low, to advance in the business many are pursuing higher education. Advanced degrees and professional designations are becoming the norm in the financial industry. An online Masters in Finance degree or MBA in Finance is an increasing route financial planners are pursuing.

And getting a Masters degree pays off-according to a CBS News article, the average earnings for a financial advisor with only an undergraduate degree is $62,710.51 while advisors with a Master’s degree earn $77,625.64, an increase of almost 20%.8 Additionally, certain online Masters degrees can complement the curriculum of various designations, including the Chartered Financial analyst (CFA) or the Certified Financial Planner (CFP) programs.

And getting a Masters degree pays off-according to a CBS News article, the average earnings for a financial advisor with only an undergraduate degree is $62,710.51 while advisors with a Master’s degree earn $77,625.64, an increase of almost 20%.8

A Final Word About Broker Compensation

Seniority affects compensation more in the financial industry than many others. The pay for a more experienced broker is often much higher (by multiples) of younger, junior brokers. More senior brokers will also inherit the “books” of retiring brokers which is essentially an additional built in revenue stream. Most stock brokers don’t make it in the business (1 in 2 by some estimates), so the longer you can stay in the business, the better.

The compensation for financial advisors also has a lot to do with who you work for. For example, a financial representative at a community bank is a lower paying position, a broker at a wirehouse earns somewhat more, while a Registered Independent Advisors (RIAs) often earns the most. This is because they will no longer be splitting fees with their firm. Of course, you need to have built up a decent sized client base before you can think about becoming an RIA. Being a broker can be a rewarding experience as you help families prepare for all aspects of their financial future.

 

1http://www.businessinsider.com/historical-trading-commissions-2014-3
2http://www.criminaldefenselawyer.com/crime-penalties/federal/Securities-Fraud.htm
3http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/03/19/is-your-financial-advisor-a-fiduciary
4http://www.ft.com/cms/s/0/5a395bb4-24a6-11e5-9c4e-a775d2b173ca.html#axzz4FkGP2ae1
5,6https://en.wikipedia.org/wiki/Series_7_exam
7https://en.wikipedia.org/wiki/Series_6_exam
8http://www.cbsnews.com/media/10-careers-where-a-masters-degree-pays-off/

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What is a Stock Broker?
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What is a Stock Broker?
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What is a Stock Broker? A stock broker is a financial professional that buys and sells stocks or closely- related securities for retail customers. Brokers often work for a firm called a broker-dealer that has a seat on an exchange such as the New York Stock Exchange. The term ‘stock broker’ is a bit outdated, with an unsophisticated connotation attached to it. It typically refers to a licensed professional who advises and facilitates trading in a client’s brokerage account and is paid a commission per transaction.
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