Broker-dealer financial services are engagements in effecting transactions in securities on behalf of others or own account. The name broker-dealer denotes two relationships. Under the broker relationship, a person or an entity acts in an agency capacity. In this case, the broker-dealer helps a customer by facilitating buying or selling of a security. The facilitator has no money at risk and only attempts to match up a buyer and a seller.
On the other hand, under the dealer relationship, the dealer is a principal in the transaction. He/she literally buys or sells securities. A broker-dealer works under extensive regulations. There is a requirement for disclosure in writing whenever acting as a dealer. They can only act in one capacity at each trading and not in both capacities. Some broker-dealers will call themselves registered broker-dealers.
Is a broker-dealer the same as a Registered Investment Advisor (RIA)? A broker-dealer is completely different from RIA. RIA provides advice, make recommendations or issue reports and analysis on securities. Note that, there is no involvement in buying and selling. Broker-Dealer financial services are bound by a low standard of conduct towards customers. They need to justify recommendations based upon suitability.
This justification means, the broker-dealer only needs to prove a recommended security is appropriate for the client. However, this standard is criticized because it allows the broker-dealer to facilitate services in their own financial interests. It is unlike a fiduciary standard which represents the highest obligation one person can have towards another.
Broker-dealer banks are entirely different from commercial and retail banks.
Why You Need a Broker-Dealer in Your Investment
As an issuer, while you consider undertaking the sale of securities, it is essential to seek the guidance of a registered broker-dealer. Lack of which can be a costly mistake. Broker-dealer financial services offer you and your counsel securities-specific expertise. You get market feedback on managing day-to-day offering logistics and structure. Also, you get compliance-related services.
When you involve a broker-dealer to assist you in your offering, you gain that broker-dealer’s knowledge about the marketplace. There being several different regulations, a broker-dealer will help you understand the requirements of the one he has specialized in. They have experience of hundreds of offerings and thus can advice what works and what doesn’t work. Through them, you can learn a structure in your offering that is less likely to attract investors.
Engaging a broker-dealer helps acquire confidence that your entire offering is compliant with the market authority regulations. They are also technically involved in the process of conducting the offering. They will handle the flow of funds as well as ensure there is due diligence in the funds’ conduct. For instance, they will see that there is no money-laundering involved or any other criminal activity.
Therefore, broker-dealer financial services protect you from bad investors as well as other circumstances that may be unfavorable. Additionally, a broker-dealer knows how to apply the most efficient technology to facilitate back-office reviews of investors. Such reviews include Know Your Customer (KYC), Customer Identification Program (CIP) and other accreditation verifications.
Securities sales, therefore, being governed by regulations, you have to observe all the requirements. A single misstep could cost you heftily in fines and in future offerings. Using a broker-dealer’s financial services will help you deal with any possible potential issues. They look at your offering from the FINRA’s standards perspective.
What to look for in Broker-Dealer
● Clear Disclosure Documents
The broker-dealer who is to offer financial services should clearly state what she/he will be providing and how much you will be paying for the services.
● Code of Conduct
She/he should not have a criminal history or allegations of misconduct. You can obtain a clue of your broker-dealer’s conduct by using FINRA BrokerCheck system to check if any complaints are filed against him/her. Gather all material facts you should be aware of before entrusting your money with any broker-dealer.
● Approachability
He/she should be somebody you can talk to and hears you out. If you broker-dealer is someone you are comfortable with, it will also be someone you can trust, like and borrow a concept from. At times, it is advisable to listen to your conscience and obey it.
If you feel you can’t cope with somebody, look for another one. Broker-dealers are easy to find. The reason why it should be someone you can cope with is that you must interact fully. He/she needs to understand your preferences, conditions, needs and values.
Advantages of going for broker-dealer financial services are many. Your investors too benefit from the involvement of a broker-dealer in an offering. They gain confidence knowing that an independent and regulated entity has reviewed the offering. They also like efficiency offered by broker-dealer management. The quality of communication also is something investors trust as FINRA regulates it.
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