If you’ve spent much time working through your finances, you may have come across the concept of a broker before, perhaps alongside a recommendation to use one, or a warning against doing so.
But what is a broker? It’s both an easy and tricky question to answer, as there are several different types of brokers in the financial sector, with each type offering a slightly different service. At Ratehub.ca, we work with brokers every day, and we’ve outlined everything you need to know about brokers below.
What is a broker?
A broker is a person or company that buys, trades, or negotiates on your behalf. A broker isn’t actually selling you a product or service. Rather, they’re connecting you to a provider or buying a product for you, as an intermediary. Some common types of brokers are mortgage brokers, stock brokers (including online brokers), and GIC brokers.
Pros and cons of using brokers
Brokers are experts in their field and typically independent of the financial providers that they work with. That means, depending on the type of broker, they can offer independent, expert advice on your financial decisions. Brokers also offer access to providers and markets that you may not otherwise be able to access.
However, using a broker may not always be the best option. Brokers work on commission, which can sometimes make a product more expensive than it would be without a broker. A good broker should be able to offset their commission with other savings, but it’s not always possible.
Different types of brokers
There are lots of different types of brokers across the financial sector. Three of the most common brokers in Canada are mortgage brokers, stock brokers (including online brokers), as well as GIC brokers.
What is a mortgage broker?
A mortgage broker helps you find a mortgage with a low rate and the right features for your needs. Mortgage brokers have access to exclusive deals and bulk discounts that can help you get an even lower rate than you’ll find on the retail market. A mortgage broker can also give you independent, expert advice on your specific financial needs and circumstances. Mortgage brokers generally don’t charge you a consultation fee, as they are paid on commission from your eventual mortgage provider.
The alternative to using a mortgage broker is to approach multiple lenders individually. This can not only take a lot of time but can cause you to miss out on a mortgage that’s a better fit for your situation.
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What is a stock broker?
Stock brokers (generally just called ‘brokers’) help you purchase shares on a security exchange, like the Toronto Stock Exchange, or the New York Stock Exchange. You’ll need to use a stock broker to buy and sell shares because most stock exchanges restrict trading to members. Your broker offers you access to their membership.
Stock brokers make money by charging you a commission for every transaction. This will either be a percentage of the transaction value, a flat fee per transaction, or a combination of both. These commissions can eat away at any trading profits you make, so it’s important to pick a stock broker with the right fee structure for you. Flat fees are generally best if you make large purchases, while a percentage fee is better for smaller transactions. Some brokers may offer investment or financial advice, often for an additional fee.
Because stock exchanges require membership to transact, stock brokers used to be unavoidable if you wanted to trade shares. However, the rise of online brokerages in recent years has changed this.
What is an online broker?
An online broker is a digital stock broker that you use through an online portal. Online brokerages have security exchange just memberships like traditional stock brokers, but offer a digital user experience, rather than using in-person brokers. Online brokers boast lower commissions than traditional brokers, which can save you money over both the short and long term.
Many online brokerages also offer low-cost portfolio management, allowing you to invest in a much more passive way than would be required with a traditional broker, while also avoiding the high management fees charged by traditional managed funds – these are known as Robo-Advisors. Many newer online brokerages emphasize Exchange-Traded Funds (ETFs), as they also share the computerized, low-cost, hyper-efficient approach to investing that online brokers embody.
Online brokers may not be right for everyone, however. If you’re buying and selling individual shares with an online broker, rather than using Robo-Advisor, you’ll need to do your own research on your purchases. A traditional stock broker, on the other hand, may be able to give you advice on your purchases.
What is a GIC broker?
A GIC broker (also called a deposit broker) is another common type of broker in Canada. GIC brokers operate more like a mortgage broker than a stock broker, although there are some unique differences. The role of a GIC broker is to negotiate for a higher interest rate on Guaranteed Investment Certificates, or GICs. GICs are savings accounts that offer a higher return than normal cash savings accounts, in return for you agreeing to leave your investment in the account for a minimum period, 2 years for example. This lets your financial institution lend that money out to other people (homebuyers, for example) at a higher interest rate than they’re paying you.
While you can invest in a GIC on the retail market, GIC brokers can often secure higher interest rates because they represent many clients. While you may only have $10,000 to invest, a GIC broker could represent $1 million worth of investments. At that scale, a broker can negotiate harder, as well as cut down on administrative costs, which can mean a better return for you.
As with mortgage brokers, GIC brokers are free for you to use. GIC brokers make their money by taking a commission from the GIC provider that you eventually invest with. The goal of a good GIC broker is to secure a high enough interest rate to make up for their commission.
The bottom line: Should you use a broker?
Whether you should use a broker or not largely depends on what type of broker you’re considering. If you want to buy or sell shares, you definitely need to use a stock broker, but you’ll have to decide on whether to use an online broker or a traditional broker.
For mortgages and GICs, however, you have the option of using a broker or going directly to a financial institution. The good news is that, because GIC brokers and mortgage brokers are free for you to consult with, there’s very little risk in speaking to a broker to see what they can offer. If they can’t find a better offer than you can find elsewhere, there’s no obligation to use their services.