An individual or firm employed by others to plan and organize sales or negotiate contracts for a commission.
A broker's function is to arrange contracts for property in which he or she has no personal interest, possession, or concern. The broker is an intermediary or negotiator in the contracting of any type of bargain, acting as an agent for parties who wish to buy or sell stocks, bonds, real or personal property, commodities, or services. Rules applicable to agency are generally relevant to most transactions involving brokers. The client is considered the principal and the broker acts as the client's agent. An agent's powers generally extend beyond those of a broker. A distinguishing feature between an agent and a broker is that a broker acts as a middleperson. When a broker arranges a sale, he or she is an agent of both parties.
In order to determine whether or not an individual is acting as a broker in a transaction, the type of services that are performed must be examined.
Types of Brokers
There are several kinds of brokers, each of whom deals in specific types of transactions.
A bill-and-note broker negotiates the buying and selling of bills of exchange and promissory notes.
A commercial or merchandise broker is an individual who works with buyers and sellers by negotiating between them in the buying and selling of goods, without having personal custody of the property. He or she offers services on a commission basis to manufacturers as a sales representative for their product. Such a broker has no control or possession of the product that is sent directly to the buyer; he or she merely acts as a middleperson in all transactions.
An insurance broker acts as an intermediary between the insurer and the insured and is distinguishable from an insurance agent. While an insurance agent is employed by, and represents, a particular insurance company, an insurance broker is a representative of the insured only. An insurance agent is bound by company rules and responsibilities, whereas an insurance broker's only duty is to aid a client. He or she owes no obligation to any company.
Real estate brokers or agents are hired to transact the buying and selling, lease, or rental of real property on a commission basis. They can also be involved with the purchase and sale of lands, and the acquisition of mortgages for others. They may also counsel and advise people who wish to buy or sell real estate.
Stockbrokers buy and sell shares in corporations and deal in corporation stock and in other securities. A stockbroker's functions are generally broader than those of other brokers. As more than a mere negotiator, he or she makes a purchase in his or her own name and ordinarily pays the purchase price. A stockbroker is often responsible for the possession of the securities with which he or she deals. Conversely, an ordinary broker neither has title to, nor possession of, property that is being purchased or sold. As stockbrokers serve in a greater capacity, their responsibilities also extend beyond those of ordinary brokers.
Regulation and Conduct of Business
The business or occupation of a broker may be regulated by the state under its police power. A municipal corporation has the power to regulate brokers who function within its boundaries if authority to do so is granted by the state.
In order for a broker to engage in business, he or she is generally required to acquire a license and pay a fee. Brokers who conduct business without a license can be fined by state licensing authorities. In some states it is illegal for any person other than a licensed broker to be paid for services concerning real estate transactions.
Laws exist that impose a license tax on brokers. Within the meaning of such laws, any individual who regularly works as a middleperson or negotiates business transactions for the benefit of others is ordinarily considered a broker. It has been held by a federal court that a statute requiring brokers to obtain a license was only applicable to those people regularly employed as brokers. An individual only casually involved in brokerage through the arrangement of only a few sales would not be considered to be engaged in the business of brokerage.
Revocation of License The state's concerns regarding brokers extend beyond initial licensing to the establishment of conditions for the maintenance of a license. The state may provide for the revocation or suspension of brokers' licenses for reasonable grounds.
The power to revoke a license may be vested in a specially designated commission that exists primarily to hear complaints about the fraudulent practices of brokers. Such proceedings are ordinarily informal, and technical court rules generally are not observed.
During a hearing, the commission is presented with evidence relating to the broker's conduct and must consider whether such conduct warrants denial of the privilege to engage freely in business.
Grounds for revocation of a license are generally based upon fraud, dishonesty, incompetence, or bad faith in dealing with the public. A real estate broker's license may be revoked or suspended because of misrepresentation used to effect a purchase or sale. Generally, the conduct of a broker in negotiating a real estate transaction on behalf of his or her principal is subject to strict fraud and deceit standards, equal to those imposed on his or her principal. It has been held by some courts that the failure of a broker to disclose material facts within his or her knowledge will create liability. Within the meaning of fraud is the pretense of knowledge on the part of the broker while executing a real estate transaction where no knowledge actually exists—for example, while selling a house a broker states that there are no concealed defects in the house, although he or she does not actually know if such defects exist.
A real estate broker's license may be suspended or revoked if duties are performed unlawfully. In addition, a broker's license can be revoked or suspended if a broker is guilty of racial discrimination in the selling and leasing of property.
Stockbrokers may be liable for various unethical activities, such as churning, which is the unnecessary trading of stocks to gain additional commissions. A consumer protection organization, the Securities Investor Protection Corporation (SIPC), has been established by Congress to aid customers of securities concerns that go out of business.
Bonds State regulations usually require that brokers, especially those engaged in the real estate business, deliver a bond to insure faithful performance of their duties. The liability of the surety guaranteeing such a bond extends only to transactions that arise during the normal course of the broker's business and that are intended to be included in the bond.
Commissions A broker is ordinarily compensated for services by the payment of a commission, based upon a portion of the value of the property in a particular transaction.
Generally, a commission is earned when negotiations between a buyer and seller are completed, and an agreement is reached. It is customary for a broker to deduct and reserve the amount of commission from funds obtained by him or her for a client. The ordinary basis for the calculation of a percentage commission is the total sale price of whatever is sold.
In order for a broker to be entitled to a commission, a sale must be completed for which the broker has been employed.
The broker's right to a commission is not dependent upon the finalization of the transaction unless otherwise agreed upon by the broker and by his or her client.
The compensation of a broker is based upon procurement of a client who is willing and able to purchase. The specific terms of the transaction must be satisfactory to the broker's client.
Of paramount importance is the prospective buyer's ability to provide the required funds at the suitable time. A broker who has properly performed his or her duties should not be denied a commission due to a failure by the parties to consummate the deal.
In the absence of any agreement to be employed by a client, a broker is not to be compensated for voluntary services. Similarly, compensation is not due a broker when a sale is made by an owner after the broker-client relationship has been terminated. A common type of termination is the expiration of a real estate listing. This rule against the payment of a commission is absolute—regardless of whether or not the sale is made to an individual whom the broker initially produced—provided the broker was given ample opportunity to complete the transaction and failed to do so. Once a broker has earned his or her commission, a client may not terminate the relationship and complete the transaction himself or herself in order to avoid paying the broker.
Any fraudulent misrepresentations or evidence of bad faith on the part of the broker will defeat his or her right to a commission. Mere negligence in the execution of duties, in the absence of bad faith, does not automatically defeat a broker's right to compensation.
Future Roles of Brokers
Technology affected the roles of practically all types of brokers. Probably the most significant developments have been related to communications, as new technologies have allowed brokers to communicate with their clients in a variety of means, thus enhancing the ability of the brokers to serve their clients' interests. Some changes were different methods in day-to-day communications, such as the common use of e-mail and fax machines. The rise in internet usage in the 1990s also caused a number of changes, as registered brokers began to serve as online customer service representatives for prospective buyers. Economic problems in the early 2000s slowed the development of the role of the broker, but as new technologies continue to develop, the role of the broker was expected to continue to evolve.
Hazen, Thomas Lee. 2003. Broker-Dealer Regulation in a Nutshell. St. Paul, Minn.: West.
Waller, Mark L. 1999. Selecting and Working with a Broker. College Station: Texas Agricultural Extension Center.
broker, one who acts as an intermediary in a sale or other business transaction between two parties. Such a person conducts individual transactions only, is given no general authority by the employers, discloses the names of the principals in the transaction to each other, and leaves to them the conclusion of the deal. The broker neither possesses the goods sold nor receives the goods procured; brokers take no market risks and transfer no title to goods or to anything else. A broker earns a commission, or brokerage, when the contract of sale has been made, regardless of whether the contract is satisfactorily executed. The broker is paid by the party that started the negotiation. In practice, merchants and other salespeople act as brokers at times.
Brokers are most useful in establishing trade connections in those large industries where a great many relatively small producers (e.g., farmers) compete for a wide market. They operate in strategic cities and keep in active touch with the trade needs of their localities and with one another. They are important in determining prices, routing goods, and guiding production, and in those functions play a part similar to that of the highly organized exchanges. Brokers also negotiate trades in property not directly affecting production; examples are stockbrokers and real estate brokers.
Types of Brokers
Employment agents are really brokers, as they bring together the buyers and sellers of labor. Merchandise brokers arrange sales between manufacturers and wholesalers or retailers, between producers and users of raw materials, and sometimes between two manufacturers. Small concerns use retail brokers instead of maintaining their own sales forces. Insurance brokers bring together insurance companies and those who want insurance. They are most useful to those needing several types of insurance protection and to those whose large risks must be divided among many companies. Real estate brokers negotiate sales and leases of farms, dwellings, and business property and are often also insurance brokers. Ship brokers keep informed of the movement of vessels, of cargo space available, and of rates for shipment and sell this information to shippers. They serve tramp carriers in the main, inasmuch as the larger ship lines have their own agents. Such brokers also serve as post agents, in which capacity they settle bills for stores and supplies, pay the wages of the crew, and negotiate insurance for the vessel and cargo. They also arrange the sale of ships. In the organized markets, such as grain and stock exchanges, commission merchants and straight selling displace brokerage in large part, but between cities and where there is no active exchange, brokers in grain and other commodities are active. Members of organized exchanges usually act as commission merchants or trade on their own account. However, in the New York Stock Exchange a group of members called "floor brokers" perform the actual trading on the exchange floor for representatives of commission houses, taking no responsibility and receiving a small fee. In the United States, note brokers buy promissory notes from businessmen and sell them to banks. Traders in acceptances and foreign bills of exchange are known in the United States as acceptance dealers. Customs brokers are not actually brokers; they act as agents for importers in estimating duties and clearing goods. The pawnbroker is a private money lender. Technology in the 1990s changed the nature and importance of some brokers, when the Internet allowed people to, for example, trade stocks and purchase insurance directly, without the aid (or with the minimum aid) of brokers.
bro·ker / ˈbrōkər/ • n. a person who buys and sells goods or assets for others. • v. [tr.] arrange or negotiate (a settlement, deal, or plan): fighting continued despite attempts to broker a cease-fire.
Hence brokerage XV; repl. †brokage (XIV) — AN. brocage.