What Is an Independent Broker-Dealer?

An independent broker-dealer is a type of financial firm that allows financial advisors to operate with more flexibility compared to traditional brokerages. These firms are not tied to specific investment products or large corporate financial institutions, which means they can offer a wider variety of investment options to their clients. Independent broker-dealers often provide back-office support, compliance services, and access to investment platforms, while allowing advisors the freedom to make unbiased decisions that align with their clients’ financial goals.

A financial advisor can help you select investments and manage your portfolio. Speak with your financial advisor matches today.

Broker-Dealer: Definition

A broker-dealer is a financial entity that engages in the buying and selling of securities, either for its own account or on behalf of clients. Broker-dealers play a key role in the financial markets by facilitating transactions, providing liquidity and connecting buyers with sellers.

The term “broker” refers to when the firm acts as an agent for clients, executing trades on their behalf. This role is akin to matchmaking – the broker helps to connect customers with a buyer or seller and in return, they collect a commission for their services. As a “dealer,” the firm buys and sells securities for its own portfolio, often earning a profit on the spread between the buy and sell price.

There are three main types of broker-dealers:

Full-service wirehouses: Offer a wide range of services, such as investment advice, research and financial planning, generally charging higher fees.
Discount broker-dealers: Provide basic trade execution services without additional advisory support, offering lower fees for more self-directed investors.
Independent broker-dealers: Allow advisors more autonomy to offer a broader range of financial products, free from corporate influence often seen in traditional firms.

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 Sets Independent Broker-Dealers Apart?

Wirehouses are typically the largest and most well-known brokerages. 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 and discount firms but they’re less restrained in what investment products they can recommend to clients.

Additionally, the relationship between advisors and independent broker-dealers tends to be different. Rather than being salaried employees, financial advisors often work as independent contractors, giving them more flexibility in how they operate. This structure can lead to differences in how advisors provide financial guidance and the level of personalization they offer, setting independent broker-dealers apart from more traditional brokerage models.

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

Registered 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.

Bottom Line

Independent broker-dealers provide a unique option for investors seeking financial advice with flexibility and a diverse range of products. Unlike traditional broker-dealers, they are not tied to a specific set of proprietary investments, allowing them to offer more personalized solutions.

Tips for Working With a Financial Advisor

Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can 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.