How Is a Stockbroker an Agent of Their Clients?

Agent

The client-broker relationship is considered unique in most states, because it is designed to benefit and protect the investor's financial interests. Whether an investor uses a full service brokerage firm, which allows the broker to make trades directly on behalf of the client, or a discount brokerage firm where the broker may only place trades at the client's request, the client is reliant on the broker's knowledge. The client trusts that the broker is acting in his best interest.

Many state's impose a fiduciary duty on stockbrokers who make trades and or recommendations on behalf of clients. This fiduciary duty requires that a broker act solely for the benefit and interest of his clients at all times. If a broker stands to make a large commission for a trade that an investor wants to place, but the broker knows that the the trade may cause his client to lose money in the near future, the broker should not make the trade, since it is not in the best interest of his client.

The fiduciary duty of a broker often conflicts with the type of compensation a stock broker receives. Most brokers receive payment on a commission only basis, which means they profit based on the value of the sales or trades they make. Likewise, since brokers receive payment for an investment regardless of whether it's in line with a client's objectives, or yield a profit for the client, a broker may have a high incentive to act in a manner inconsistent with his fiduciary duty. Brokers employed by discount firms receive a salary, and are therefore less likely to experience a conflict interest.

When choosing a broker, clients should explain their investment needs, income, assets and existing investments. By doing this, clients can appropriately determine what brokers services and goals match with their own. For information about specific broker services and fees, investors can contact their local brokerage firm or access online brokerage resources.