Stockbrokers are securities and investment product sales agents who make general recommendations and execute buy and sell orders for stocks and other securities on behalf of their clients. They are employee representatives of the brokerage firms for which they work. As such, they deal in the specific securities and investment products their employers offer, which may include a variety of financial products like mutual funds, annuities, investment trusts, and commodities, in addition to individual stocks and bonds.
Stockbrokers go by a variety of different names: Although the investing public typically refers to them as stockbrokers or just brokers, within the industry they are more frequently referred to as broker-dealer agents, securities sales agents, or registered representatives, which implies that they are registered with state and federal authorities as representatives of the brokerage firms for which they work.
Stockbrokers may work for full-service brokerages or discount brokerages. Brokers at discount brokerages don’t typically make recommendations, but rather just execute trades as salaried employees. On the other hand, brokers at full-service firms build their own client base and work primarily on commission. These full service brokers make general recommendations to retail investors as to what securities to consider based on the historic performance of these securities and how current market conditions could influence their future performance. However, they do not have discretionary authority over client accounts, so ultimately, the decision to buy or sell must be made by investors themselves.
Stockbrokers are legally obligated to make recommendations in accordance to what is referred to as the “suitability standard”. The suitability standard requires them to assess their clients’ age, risk tolerance, and financial standing so as to recommend investment options that are appropriately suitable based on these factors.
Stockbroker Information By State
- District of Columbia
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
Stockbrokers’ employing broker-dealer firms will see to it they are legally permitted to work with retail investors by registering them with the state Securities Commission of each state in which they have clients. Stockbrokers operate under the governance of these state Securities Commissions, as well as the federal Securities and Exchange Commission through their firm’s membership with one or more self regulatory organization (SRO), the largest and best known of which is the Financial Industry Regulatory Authority (FINRA).
Critical Functions of Stockbrokers
The seven critical functions of a registered representative as defined by the Financial Industry Regulatory Authority:
- Soliciting business from customers and would-be customers
- Evaluating the financial needs, assets, and available investment capital of customers, and helping them determine their investment objectives
- Giving information to customers and prospective customers about investments and making appropriate recommendations
- Opening, transferring, and closing customer accounts and keeping appropriate account records
- Explaining the specifics of various securities markets, the organization of the markets, how the markets function, and the most important factors that affect the markets
- Obtaining and verifying customers’ buy and sell instructions, placing orders, and following up on completed of transactions
- Keeping an eye on customer portfolios and making recommendations based on changes in economic conditions and changes in the customer’s needs and objectives
Brokers must be licensed for each specific securities product they recommend and sell. The most inclusive license is the General Securities Representative license, earned by passing the Financial Industry Regulatory Authority’s (FINRA’s) Series 7 Exam. This license allows registered reps to deal in all of the various types of securities:
- Corporate securities: Stocks and bonds, real estate investment trusts, collateralized mortgage obligations, and more
- Direct participation programs (limited partnerships): Programs with flow-through tax consequences, such as real estate programs, oil and gas programs, and S corporation offerings
- Investment company products like mutual funds and other closed-end redeemable securities of companies registered under the Investment Company Act of 1940, which regulates the organization of companies whose primary business is investing, reinvesting, and trading in securities
- Municipal securities and municipal fund securities
- Options, which are the right, without obligation, to buy or sell a specific amount of a specified security at a specified price during a specified period of time
- U.S. government bonds
- Variable contracts (annuities)
Becoming a Stockbroker
Although becoming licensed to deal in securities does not require a college degree, most firms prefer to hire stockbroker trainees who have, at minimum, a bachelor’s degree. Relevant fields of study include accounting, business, economics, and finance.
The common hiring practice in the industry is for broker-dealer firms to hire college students as summer interns before their senior year, and then after graduation, offer full-time jobs to the most promising candidates.
New hires are stockbroker trainees who perform duties that support full time stockbrokers as they serve clients. Trainees also often receive firm-sponsored training that prepares them to pass the General Securities Registered Representative Examination (Series 7 exam) or any other applicable exam, which would allow them to actively solicit business and trade securities. Large firms may offer in-house training programs, while smaller firms may send their trainees to attend classes with third-party training organizations.
Taking the Series 7 Exam requires applicants to be sponsored by registered broker-dealer firms for which they have worked as trainees for at least four months. When a firm sponsors an applicant it means that the firm is positioning that applicant to become a full-time employee and is covering the costs associated with the exam.
Candidates who pass the required exam must then have a fingerprint card made in order to have it filed with the Securities and Exchange Commission, and must also pass a background check that looks for criminal behavior specific to financial fraud.
Stockbrokers are then registered by their employer with the self regulatory organization (SRO), FINRA. This registration makes sure that broker’s individual information pertinent to their professional activities is available to the public through the Broker-Check national database. Prospective clients and regulators use the Broker-Check registry to verify a registered rep’s license and review any disciplinary action taken against them.
Stockbrokers are also registered by their employer with the Securities Commission of each state in which they will do business, at which point they may solicit clients in those respective states.
Exams for State Registration
In addition to the securities product exam(s), like the Series 7, required to demonstrate knowledge of the specific products stockbrokers will deal in, most states also require that stockbrokers take and pass the Uniform Securities Agent State Law Examination (Series 63). This exam deals with the Uniform Securities Act, which lays out the principles of state securities regulation, including topics such as recordkeeping requirements and the security of client information.
Stockbrokers who plan to act as investment adviser representatives (IARs) need to take the Uniform Combined State Law Examination (Series 66) rather than the Series 63. In general, states define an investment adviser representative as someone who receives compensation for the following:
- Recommending or otherwise giving advice about securities
- Managing client accounts or portfolios including having discretionary authority
- Soliciting or selling investment advisory services
Other Exams and Licenses
Although the Series 7 exam lets stockbrokers trade most securities products, and is by far the most comprehensive, some products do require an additional license:
- To trade commodities and futures, stockbrokers must pass the Series 3 exam (National Commodity Futures Examination) and register with the National Futures Association (NFA) as an “Associated Person” of an NFA-registered securities firm. The NFA is a self-regulatory organization subject to the oversight of the U.S. Commodity Futures Trading Commission, which regulates all U.S. futures exchanges.
- To trade equity and convertible debt securities on a principal or agency basis, stockbrokers need to pass the Series 55 (Equity Trader Limited Representative) exam.
Other more limited securities licenses are available, but they are less comprehensive than the Series 7. These licenses include:
- Series 6 (Investment Company Products/Variable Contracts Limited Representative) – primarily allows selling mutual funds and variable annuities
- Series 22 (Direct Participation Programs Limited Representative)
- Series 42 (Registered Options Representative)
- Series 52 (Municipal Securities Representative)
- Series 62 (Corporate Securities Limited Representative)
- Series 72 (Government Securities Limited Representative)
Additional exams are required for stockbrokers who will act as supervisors or principals of a broker-dealer firm. For example, the series 9 and 10 exams lead to the General Securities Sales Supervisor license.
Securities Industry Regulation
Stockbrokers are subject to the rules of the Securities and Exchange Commission (SEC), created by the congressional Securities Exchange Act of 1934. The SEC oversees regulation of the securities industry in the U.S. and enforces securities laws in close collaboration with the various self-regulatory organizations (SROs) that help enforce securities industry standards and requirements.
The primary SRO is the Financial Industry Regulatory Authority (FINRA), created in 2007 by a merger of the National Association of Securities Dealers (NASD) and the regulatory section of the New York Stock Exchange. FINRA manages all testing and registration of securities professionals using two electronic filing systems:
- Central Registration Depository (CRD), used by broker-dealer firms and stockbrokers
- Investment Adviser Registration Depository (IARD), used by investment advisers and their representatives
Other SROs include all of the national securities exchanges, such as AMEX and NYSE, and clearing agencies, such as the Boston Stock Exchange Clearing Corporation and the Chicago Mercantile Exchange.
Another SRO is the Municipal Securities Rulemaking Board (MSRB), which makes rules that govern the dealings of broker-dealers and banks that underwrite, trade, and sell 529 college savings plans, tax-exempt bonds, and other types of municipal securities.
The Financial Industry Regulatory Authority has two continuing education requirements for the securities industry. One is the Regulatory Element Program that emphasizes regulatory, compliance, ethics, and sales practice standards. Registered representatives with a Series 7 license must complete this computer-based training program within 120 days of the second anniversary of the date they received their license. Then, they have to complete this training program every three years throughout their careers as it is frequently updated to reflect regulatory changes in the financial industry. The modules included in the Regulatory Element Program:
- Communicating with the Public
- Client/Product Suitability
- New and Secondary Offering & Corporate Finance
- Handling Customer Accounts/Trade and Settlement Practices
The Firm Element of continuing education requires that broker-dealer firms facilitate formal in-house training programs that provide current information about job and product-related topics. Firm Element training would cover three main areas:
- Investment features and associated risk factors
- Regulatory requirements related to products, services, and strategies
- Sales practices and suitability standards
Stockbrokers may also attend outside conferences and training seminars to keep up with new products and services and other developments that affect the securities industry. Stockbrokers looking to move up often earn MBAs or other types of graduate degrees, as more advanced degrees are often required for higher-level positions within the financial industry.
Employment and Salary
In May 2010, the U.S. Bureau of Labor Statistics reported that 50 percent of securities, commodities, and financial services sales agents earned between $40,860 and $124,450 annually, with the median figure being $70,190. The average salary was reported to be on the higher side of this, at $95,130. About 45 percent of these sales agents worked in the securities and commodity contracts intermediation and brokerage industry and earned an average salary of $111,160. Top earners who made up the 75th percentile, earned an average of $124,450.