People often use the terms "broker" and "agent" interchangeably when talking about investment professionals. Technically, the two terms have very different meanings that are based upon state and federal securities and licensing laws. You cannot buy and sell securities without involving a broker but an agent may or may not be part of the equation.
In a wider context, a broker is someone who arranges a contract or agreement between two parties. As defined by the Securities Exchange Act of 1934, a broker is a person engaged in arranging securities transactions on behalf of others. However, within the securities arena the meaning of "person" is not limited to a living human being. Consequently, a broker may be an individual or an entity such as a brokerage company or an investment bank. Brokers are typically required to register with the Securities and Exchange Commission.
State licensing agencies use the term "agent" to refer to salespeople who work for insurance firms. Insurance companies register to operate at the state level while insurance firm employees must register as the company's agents before selling insurance policies. Some hybrid investments, such as variable annuities, are subject to regulation from both state insurance divisions and federal securities regulators. In states such as Florida, you cannot sell a variable annuity unless you pass the series 63 licensing exam. Upon completion, you receive a license to operate as a sales agent. You can then sell insurance company products that contain marketable securities.
Agents receive commissions for selling variable annuities and similar products. Likewise, brokers receive commissions for mutual fund sales. When an investment bank registers as a broker, its salespeople are referred to as representatives as opposed to brokers. When a sale is made, the firm receives the commission and a portion of it is passed onto the sales representative. If the broker involved is an individual as opposed to a firm, then that individual keeps the entire commission. Aside from commissions, brokers also generate revenue by charging fees for other kinds of securities trades.
The intended meaning behind the term "agent" can also create confusion. Stocks are not insurance products, so a stock trade would not involve a sales agent. However, from a legal perspective, a broker is acting as an agent of another party when conducting a securities trade. If that broker is an individual as opposed to an entity, then he or she probably happens to hold an insurance license to operate as a sales agent. Therefore, the line between brokers and agents can be muddied or even non-existent.
- U.S. Securities and Exchange Commission: Broker-Dealer Registration
- FINRA: Learn About Different Types of Investment Professionals
- Bureau of Labor Statistics: Securities, Commodities, and Financial Services Sales Agents
- Nebraska Department of Banking and Finance: Broker-Dealer vs. Investment Adviser
- North American Securities Administrators Association: Series 63 Overview
- Florida Division of Insurance Agent and Agency Services: Resident Life, Health and Variable Annuity License
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