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What Is an Independent Broker-Dealer?


Getting professional financial advice can be helpful when managing your portfolio or building wealth for the long-term. There are many places you can look to for that advice, including independent broker-dealers. An independent broker-dealer is authorized to buy and sell securities, including stocks, bonds, mutual funds and other investments, on behalf of clients. Working with an individual or firm that has independent broker-dealer status can offer advantages to investors, but it’s important to understand how this type of arrangement works.

Broker-Dealer: Definition

A broker-dealer is an individual or firm and as the name suggests, they can perform two different functions.

On the broker side, individuals or firms help their clients to buy and sell securities, such as stocks or mutual funds. It’s sort of like matchmaking – the broker helps to connect you with a buyer or seller and in return, they collect a commission for their services.

In dealer mode, the broker-dealer is actively participating in the sale of securities. In other words, they’re trading in their own accounts, rather than trading on behalf of a client. Broker-dealers profit by selling securities for more than they purchased them. As a rule, broker-dealers can only benefit financially from one side of a buy-sell transaction, not both.

Firms that bear the broker-dealer label can be smaller boutique operations or larger brokerages. Some of the most well-known broker-dealer firms include Charles Schwab, Fidelity Investments and TD Ameritrade. Broker-dealers are regulated by the Securities and Exchange Act of 1934 and they can also be subject to regulation at the state level. This act governs, among other things, how broker-dealers are paid and what kind of activities they can engage in.

What Is an Independent Broker-Dealer?

Broker-dealers can be grouped into one of two categories: wirehouses and independent broker-dealers. Wirehouses are typically the largest and most well-known brokerages and what distinguishes them are their investment offerings. A wirehouse firm only sells its own investment products. Those products can include mutual funds, annuities and other investments but they’re proprietary to that company.

An independent broker-dealer, on the other hand, offers investment products from other companies. So while you may still be able to invest in stocks, mutual funds, bonds, fixed income, annuities and other investments, they’re not exclusive to the company you’re working with. Independent broker-dealer firms and individuals can offer similar services to full-service discount firms but they’re less restrained in what investment products they can recommend to clients.

Advantages of Working With an Independent Broker-Dealer

The main benefit of working with an independent broker-dealer is having access to a wide range of investment options. You could build a basic portfolio using stocks, mutual funds and bonds, for example, but an independent broker-dealer could also offer alternative investments, such as hedge funds or commodities.

That can help with diversifying your portfolio to manage risk. Ideally, a properly diversified portfolio helps you to achieve your investment goals without over- or under-exposing you to risk.

In addition to securities, independent broker-dealers can also offer other investment products and services that you might find helpful when shaping your investment plan. For example, the list of things your broker-dealer may offer includes:

  • Wealth management services
  • College savings accounts and college planning advice
  • Retirement accounts, including IRAs and rollover accounts
  • Insurance and annuity products
  • Retirement accounts and cash management services for small business
  • Money market funds and savings accounts
  • Credit cards and loans

In other words, working with an independent broker-dealer could be a way to create a comprehensive strategy for managing your money. Every independent broker-dealer is different in terms of what they offer, so it’s important to take your time in comparing them.

As part of that comparison, consider how much a broker-dealer charges for its services. Fees can be structured in different ways, depending on the firm or individual you’re working with. For example, you might pay a flat fee for advisory services while paying a commission fee to buy and sell securities. And certain investment products, such as annuities, can have their own management and administrative fees.

The good news is you may pay less in fees when working with an independent broker-dealer versus a larger wirehouse broker-dealer. Keeping fees and costs to a minimum matters for holding on to more of your investment returns and wealth over the long-term.

Independent Broker-Dealers vs. RIAs

Independent broker-dealers in a discussionRegistered investment advisors are another category of financial professional and they’re often confused with independent broker-dealers. An RIA is regulated under the Investment Advisers Act of 1940 and as such, they’re held to a fiduciary standard. Being a fiduciary means that a registered investment advisor has a duty to act in their clients’ best interests at all times. RIAs must also avoid conflicts of interest.

By comparison, a broker-dealer, independent or otherwise, was historically held to a suitability standard only. This means that any service or product they recommend only has to be suitable to a client’s needs. Regulation best interest, however, requires broker-dealers to place the client’s interests ahead of their own when recommending an investment strategy or security.

Some broker-dealers can be dually registered, meaning they’re also registered investment advisors. These broker-dealers are sometimes referred to as hybrid advisors, since they combine two roles. Working with a hybrid advisor could open up even more investment options but it’s important to understand when the advisor acts as a broker-dealer and when it’s acting as an RIA. That can directly affect what you pay for advisory services and how much you’re charged, i.e. paying a flat or hourly fee versus paying a commission.

The Bottom Line

Independent broker-dealers work on behalf of clients to buy and sell securities, while also buying and selling within their own accounts. An independent broker-dealer can offer investment products as well as financial advice when planning for college, retirement or other goals. A broker-dealer and an RIA aren’t the same, although a broker-dealer can also be an RIA if they’re dually registered.

Tips for Working With a Financial Advisor

  • If you don’t have an advisor, or if you’re thinking of switching financial advisors, SmartAsset’s financial advisor matching tool can help. The tool connects you with advisors in your local area just by answering a few questions. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • When comparing the options for getting financial advice, it’s helpful to understand the difference between a fee-only and a fee-based advisor. Fee-only advisors are only paid for the services they provide. A fee-based advisor, on the other hand, can charge you fees for their services but they can also be paid a commission on investment products they sell.

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