Working as a Commodity Broker or Opening a Brokerage Firm

Some Things to Consider Before You Take the Plunge

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Many experienced, successful commodity brokers and traders reach a point where they consider opening their own brokerage firms. They would gain the opportunity to make significantly more income, but the venture also involves a lot more work and responsibility. Making the right choice for your own career depends on your personal strengths, weaknesses, and desires.

Working as a Broker for a Firm

Many people are perfectly happy working for a commodity or other brokerage firm. You can negotiate a good commission split or bonus plan, and the better you perform, the more strength you'll have in negotiating a good compensation package. Many brokers actually like working for someone else because it means they don’t have to worry about the business side of things. They just produce and go home at the end of the day.

Brokerage firms often provide administrative support as well. The support team offers leads, mentoring, training, trading terminals, and sometimes a credible and respected company name. All of these can help a broker conduct more business and earn more money. The costs of these benefits can be enormous if you decide to venture out on your own.

Starting Your Own Brokerage Firm

Almost every broker has some type of issue with the way his firm is being operated. When you open your own brokerage firm, you can run the business any way you prefer. You'll have the freedom to prosper without anyone holding you back when you're your own boss, and you'll receive all commissions on any business you do, keeping 100 percent of all your commission transactions. You can also leverage the efforts of other brokers you bring onboard.

On the other hand, starting a new brokerage firm, just like starting any other business, can be very difficult. A new company most likely won’t have any real name recognition behind it and you may find attracting new clients to be your biggest hurdle.

Your next consideration would be whether you want to open a full-service brokerage or discount brokerage. You'll have to manage the trading and open new accounts as a full-service firm while simultaneously running the business. This might be more work than you expect or want to manage.

Opening an online brokerage firm has its own challenges. It's become a very competitive marketplace and traders seek low commissions. You'll need to think realistically about whether you can compete with larger and more established firms on low prices or better services.

Can You Take Your Clients With You?

The initial startup costs and the ongoing expenses you'll have to carry every month may become more than you can afford. Theoretically, you'll be starting out with zero clients and zero dollars in revenue. Expect that it will take time before you generate enough clients and enough revenue to support your business. Meanwhile, you'll incur a lot of expenses to generate those clients. Having enough startup capital is essential for your venture's survival.

Brokers can position themselves to make the change if they have a large book of clients they can take to their new firm. However, most employers make you sign a non-compete agreement if you're going to work for their brokerage firm. They don’t want you to take clients or proprietary information with you when you move on.

You can make a good case for taking your clients with you if the brokerage firm didn't fully train you and open your accounts. A brokerage firm that pays for leads and covers all your expenses will have a good argument against you, but if you brought clients in through personal relationships and paid for some of your own expenses without signing a non-compete agreement, you might be successful.

Opening a commodity brokerage firm involves a lot of planning and upfront decision-making. It's relatively easy to start, but being successful on an ongoing basis is the real challenge. Review all the pros and cons and make an honest assessment of your situation before you make a decision.