From the time that traders gathered under a buttonwood tree on Wall Street until the 1970s, stockbrokers were known primarily as salespersons who got rich by recommending stocks and bonds to wealthy speculators. And while many brokers still do this today, the role of stockbrokers has evolved and expanded considerably over the past few decades. Those who decide to explore this career path will face many challenges, but can also reap substantial monetary rewards.
There are a number of steps involved in becoming a successful broker, and a plethora of career paths one can take. Your path may begin with your college education.
Students who wish to explore becoming stockbrokers should consider majoring in financial planning as undergraduates, and possibly continue their studies in graduate school. This provides the majority of technical knowledge needed to start a career in the financial planning industry, and will help qualify a student to sit for the CFP board exam or earn other credentials, such as the CLU or ChFC.
Students who want to become stockbrokers might also consider majoring in business, finance, economics, or accounting to gain an understanding of what drives the economy and the forces that influence and determine the price of securities. Those who major in accounting and become CPAs may gain a leg up over their peers.
Testing and Background Checks
Conceptually, becoming a stockbroker is fairly simple (although not easy). First, an employee must pass a background check, which typically consists of a credit check and a criminal background search. Any item of substance in either of these categories – such as such as a bankruptcy, tax liens or levies, or a conviction of anything beyond a minor traffic violation – will most likely disqualify the applicant.
Next, prospective brokers need to pass the securities licensing tests that must be sponsored by a broker-dealer. For some prospects, this is the hardest part of the process.
Stockbrokers in the United States are required to obtain several licenses - such as the Series 7 and 63 licenses – before they are allowed to transact business with clients. Each license is obtained by passing the corresponding exam.
- Series 7. This exam is required to become a general securities registered representative. The exam is a rigorous six-hour test that covers all types of individual and packaged securities, including stocks, bonds, partnerships, UITs, mutual funds, and variable annuities, as well as ethics and securities regulations. This is considered to be, by far, the hardest of all the securities exams.
- Series 63. The 63 covers state blue-sky laws and must be taken next in order to transact business. This test is fairly short and considerably easier than the 7.
- Series 65. Many firms require their brokers to become Registered Investment Advisers so they can use professional money management service platforms.
- Series 66. This exam is a combination of the Series 63 and 65 exams.
- Series 3. This is required to sell commodities futures contracts.
- Series 31. This exam is necessary to sell managed futures funds. It’s often obtained in lieu of the Series 3.
Most firms also require their brokers to obtain a life insurance license in order to sell life insurance and variable annuities.
Getting a Job as a Stockbroker
Those who venture into the securities industry will begin by applying to brokerage firms and interviewing for jobs. There are several different paths that aspiring brokers can take in this business – the right one depends on various factors, such as the broker’s personality, business connections, sales skills, and technical aptitude.
Full-Service Brokerage Firms
A full-service firm is always a good place to start, even for those who may not genuinely wish to become full-service brokers. The process that applicants typically undergo at these firms includes:
- Standard initial interviews and personality tests that screen candidates to ensure they are sufficiently extroverted to succeed at the job.
- A high-powered, paid training program that begins with a few months devoted to studying for and taking all the necessary securities and insurance exams. (Those who fail to pass the Series 7 exam the first time are often terminated.)
- Several weeks of sales and product training from different sources and vendors.
After the training period is complete, reps will receive personalized business cards and are given either a very small office to work in or, as is often the case, a desk in a large room often referred to as the “bullpen.” This allows the new brokers to work together, and to teach and encourage each other.
It’s at this point that the real task of finding prospects and clients begins. Most major full-service firms have very high sales quotas that must be met within a short period of time, such as six months. Brokers are expected to prospect for clients through the following means:
- Cold Calling. The Do-Not-Call lists have made this form of prospecting a risky proposition. Many brokers and firms now limit their telephone solicitation to responding to postcard mailings or Internet responses by potential prospects.
- Networking. Most firms expect their brokers to solicit their friends, families, and acquaintances for business. Business networking can be critical; those with affluent networks of people to tap into will have a much easier time getting started in this business.
- Seminars. This tried and true method of generating prospects has worked for thousands of brokers. However, this form of prospecting can be expensive, and requires the ability to make effective group presentations.
Most firms require both a minimum number of accounts and level of assets by the end of the trial period. However, this period can last as long as two years, and the firms pay the broker a salary with benefits that can be based on either their previous earnings or a set minimum amount.
After a broker survives the initial trial period, the salary is usually removed and the broker is paid commissions according to the firm’s payout grid, which will rise with the broker’s production. The payouts differ somewhat from one firm to another, but are always designed to encourage greater production.
For example, a broker may only get 35% of gross commission for the first $100,000 of gross commissions earned, and then receive 45% of commissions on the next $100,000, and so on. Commissions can range up to 75% or 85% of gross. Once a broker reaches a certain level of production, they will often get their own office and perhaps a sales assistant. But these perks are hard-earned, usually taking several years.
Those who apply with major full-service firms should also understand that these employers are chiefly interested in finding superstar million-dollar producers, and essentially set up the majority of their new employees to be the fall guys for the cream of the crop.
However, this should not necessarily deter prospective brokers from signing on at one of these agencies. They can still receive a minimal salary while studying for exams, and will receive free training classes and materials. Those who do this on their own will often pay several hundred dollars for study aids plus the cost of the exams themselves.
Moreover, the sales and product training that firms provide can help to quickly familiarize new hires with the industry’s latest products and services. In fact, if brokers fail to meet their quotas at these firms and lose their jobs, they will quickly discover they are substantially more marketable than they were when they began. This is because many firms that have no interest in hiring unlicensed personnel will now consider them for employment.
Those who dislike the high sales pressure that comes with full-service brokerage firms may be more at home working for a discount broker, such as Scottrade, Charles Schwab, or TD Ameritrade. These firms usually require some level of commission production, but nothing like the full-service firms. Cold prospecting of any kind is seldom required. Most brokers who work at these firms get a permanent base salary plus benefits, and can still earn extra commissions as well.
A typical day in the life of a discount broker consists of:
- Placing trades for customers via phone and in person
- Answering customer questions and dealing with complaints and other issues
- Performing various administrative tasks, such as completing and filing client paperwork, organizing and analyzing client data, reporting the day’s activities, and handling cash and securities that are deposited with the firm
Working at a bank can be an excellent alternative for those who do not have much of a network. Banks usually have lower payouts than other full-service firms and generally will only hire licensed personnel. But the broker is then able to tap into the bank’s customers and market to them.
Bank brokers are usually provided with their own office inside the bank and can make a good living by convincing bank customers to buy fixed annuities and other conservative products. In many cases, the bank will also have a personal banker that is licensed to sell fixed annuities to customers. The broker will often get a portion of the commission, in addition to the sale being credited to his or her production quotas.
The key to working this type of job effectively is to build good business relationships with bank employees (especially the manager) and to encourage them to refer customers on a regular basis. Most successful bank brokers have an efficient system of working with the bank personnel, as well as external channels of marketing they can turn to when bank employees are occupied with their own tasks.
Those who have established a book of business (or have the means of doing so without needing the support of a full-service firm) may want to look to an independent broker-dealer, such as Raymond James or LPL Financial. These firms offer a wider range of products and services than other types of firms, as well as much higher payouts – typically in the 80% to 95% range.
This type of arrangement is ideal for someone who has built up a book of business elsewhere, such as at a bank or discount firm, and is now ready to manage this book independently. Because the payouts are so much higher, a lower amount of commission income is needed to maintain the same standard of living.
CPAs who have their own client base are prime targets for this type of firm because they already have a cadre of clients who trust them with most (or all) of their financial information. CPAs, tax preparers, and accountants also have the inside track for retirement plan and corporate business, which can be substantial. For example, those with a large book of small business clients can probably do a few non-qualified plans, which are typically very lucrative.
Obstacles and Challenges
Being a broker is not an easy job. Those who start in this business can expect to encounter many obstacles on their way to success, including:
- Long Hours of Prospecting. Most brokers’ initial sales efforts are filled with a great deal of rejection and frustration. This is partially because financial publications warn the public not to use brokers that have less than five years’ experience. Therefore, many brokers must rely upon business from friends and family in order to get started. New brokers can also expect to spend many nights and weekends pounding the pavement and marketing themselves.
- Constant Sales Pressure. Although the initial quotas that brokers face are usually the hardest to reach, most firms continually reset these quotas and expect their brokers to make them on an ongoing basis.
- Substantial Learning Curve. Brokers must quickly learn the complexities of placing trades and orders, and the rules that govern this process. They must also assimilate a great deal of administrative detail pertaining to handling cash, paperwork, and securities within a very short time, in addition to keeping up with market and product news on a daily basis. Those who recommend individual securities must also learn how to research their offerings effectively.
- Customer Service. Brokers will inevitably have to deal with unhappy clients who may or may not be reasonable in what they expect from their investments.
- Low or Uncertain Income. Most brokers who start out can expect to earn next to nothing for the first year or two of production, although they may be given a base salary or draw against commission. But even those who are established can expect their earnings to rise and fall in accordance with several variables, such as consumer sentiment, market action, and their own prospecting efforts.
- Business Expenses. Although a broker’s income may fluctuate, most expenses remain fairly constant. Life, health, and disability premiums – as well as the cost of errors and omissions insurance – are standard expenses for most brokers. These expenses are in addition to marketing and advertising costs and overhead, such as rent and utilities. Compensation for assistants and other personnel is another major expenditure that must be accounted for in a broker’s cash flow.
- Continuing Education. CE is required to maintain licenses on an annual basis, and many firms also strongly encourage their brokers to earn professional designations, such as the CFP, in order to improve their marketability.
Rewards and Benefits
Those who can get past the initial obstacles and make it over the hump can enjoy very rewarding careers. Some of the perks that come with being a broker are:
- High Income. Established reps often make six-figure incomes, especially as they build their books of business and their payouts increase. Also, many products that brokers sell, such as mutual funds and annuities, pay residual incomes that build up over time to provide a substantial cushion of commissions.
- Administrative Assistance. Successful brokers often work in plush offices with staffs of professionals who handle office administration and compliance issues. Most established reps either share a sales assistant with someone, or have one of their own.
- Short Workdays. The length of the typical workday tends to shrink for brokers as their tenure in the business increases. Long hours of marketing and prospecting eventually give way to six-hour workdays that often end shortly after the markets close and the day’s trades have been processed.
- Special Incentives. Firms usually offer additional perks to top performers, such as commission bonuses, participation in non-qualified plans, and payment of various types of expenses such as office overhead or administrative assistance.
Stockbrokers face many challenges in their jobs, such as compliance, sales quotas, bear markets, and bureaucracy. But the rewards can be well worth the frustration and effort. There are many paths to success in this business, and those who fail with one company should not hesitate to try again in a different setting. For more information on becoming a stockbroker, log on to FINRA’s website.
Have you explored becoming a stockbroker? What have been your biggest challenges?
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