Broker or agent: what is the difference?

An agent is a person authorised to act for one principal, on that principal's behalf and under its control, while a broker is an intermediary who brings two parties to a deal and is paid for arranging it. That is the general legal idea, and it stops being reliable the moment you name an industry: in United States real estate the broker is the senior licence and the agent works under it, in insurance the two words say whose side the intermediary is on, in freight the agent works inside a broker's or a carrier's organisation, and in securities the firm is the broker while the individual is, in many state laws, the agent.

The rules below come from statutes and regulators in the United States, the United Kingdom and Queensland, Australia, and each one is named with its country or state. Law differs from one jurisdiction to the next, so treat this as general information, not legal advice, and check the rule of the place where you work before you print a title on a card or sign a fee agreement.

What is the legal difference between a broker and an agent?

In general law, an agent is defined by a relationship and a broker by an activity: the agent stands in for a principal, the broker arranges a transaction between two parties. The American Law Institute's Restatement (Third) of Agency defines agency as the fiduciary relationship that arises when one person, the principal, manifests assent to another person, the agent, that the agent shall act on the principal's behalf and subject to the principal's control, and the agent consents to act. Three things follow from that sentence. The agent has a principal. The agent owes that principal loyalty: the same Restatement states that an agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency. And the agent's acts, inside the authority given, count as the principal's acts.

A broker, in the ordinary commercial sense, is a person who for compensation negotiates or arranges a deal between a buyer and a seller, a shipper and a carrier, an insured and an insurer. The statutes that define brokers nearly all use the same construction. United States federal securities law defines a broker as any person engaged in the business of effecting transactions in securities for the account of others. The federal motor carrier regulations define a freight broker as a person who, for compensation, arranges or offers to arrange the transportation of property by an authorised motor carrier. Florida's yacht law defines a broker as a person who, for compensation or in expectation of it, sells, buys, lists or negotiates the sale, purchase or exchange of yachts for others.

The two ideas overlap, and that overlap is the source of most of the confusion. A broker is very often somebody's agent: a listing broker is the seller's agent, an insurance broker is the insured's agent for placing the cover. The word broker tells you the business the person is in. The word agent tells you whose interests the person is bound to serve.

Why do the two words change meaning from one industry to the next?

The words change meaning because each industry's licensing law borrowed them to solve a different problem. Some laws use the pair to mark whose side the intermediary is on, others use it to mark rank on a licensing ladder, and others use it to separate a firm from the individuals who act for it. Reading a title correctly therefore starts with knowing which of those three uses the industry has chosen.

The table sets out the meaning each industry gives the two words, with the jurisdiction the rule was read in. It describes the legal vocabulary; everyday speech is looser, and a United States real estate salesperson is called an agent by everyone, including the salesperson.

Who is the broker and who is the agent in real estate?

In most United States states the real estate broker holds the licence that lets a business operate, and the person the public calls an agent is a salesperson licensed under that broker. California's Business and Professions Code shows how firmly the line is drawn. It makes it unlawful for a broker to compensate, for licensed activity, anyone who is not a licensed broker or a salesperson licensed under that broker, and it states that no real estate salesperson shall accept compensation for activity requiring a licence from anyone other than the salesperson's supervising broker. A salesperson who wants to share compensation with another licensee may do it only through that broker. Client money follows the same line: a California broker who receives funds on behalf of another must place them in a trust account, in a neutral escrow depository or in the hands of the principal, and a salesperson who receives trust funds must immediately deliver them to the broker.

The vocabulary is not even uniform inside the United States. Washington State's licensing law calls every individual licensee a broker, defined as a natural person acting on behalf of a real estate firm to perform real estate brokerage services, and reserves the titles managing broker and designated broker for the supervising roles.

Queensland, Australia reverses the words. The Australian Government's business licence information service, describing the Queensland rules, presents a real estate agent licence as the full licence, and a real estate salesperson registration as a certificate that lets a person work only as an employee of a licensed agent; the registration does not allow its holder to conduct auctions or to operate trust accounts, and a person who wants to work as a contractor needs the full licence. The senior role is the agent, and the word broker does not appear in the ladder at all. The broker of record, the one licence holder who carries the supervision duty in an office, has its own article on this blog.

Whom does an insurance broker represent, and whom does an insurance agent represent?

In insurance, an agent represents the insurer and a broker represents the insured. The New York Insurance Law states it in those terms: an insurance agent is an authorised or acknowledged agent of an insurer who solicits, negotiates or sells insurance contracts, and an insurance broker is a person who, for compensation, solicits, negotiates or sells insurance, or places risks, on behalf of an insured other than itself. The same law groups both under a wider word, insurance producer, which is why a licence may say producer even though the legal relationship is one or the other.

The line is not clean, and the statutes say so. Under the New York Insurance Law, an insurer that delivers a contract of insurance to a broker is deemed to have authorised that broker to receive the premium on its behalf, provided the broker receives the payment within 90 days after the due date. For the single act of taking the premium, the insured's broker is the insurer's agent. The United Kingdom reaches a similar result by contract: the Financial Conduct Authority's client asset rules allow an intermediary to hold money as agent of an insurance undertaking only under a written agreement with that insurer, and where it does, a premium counts as received by the insurer when the intermediary receives it. One firm, one policy, two different principals depending on which task you look at.

What do broker and agent mean in freight?

In United States trucking, the broker is the registered firm that arranges transport, and an agent is a person who works inside the organisation of a carrier or of a broker. The federal motor carrier regulations exclude from the definition of broker a carrier's own employees and its bona fide agents, described as persons who are part of the normal organisation of a motor carrier and act under its direction, under a preexisting agreement that leaves them no discretion in allocating traffic among carriers. A person who chooses between carriers for a fee is arranging transport and falls on the broker side of the line.

The trade also uses the term freight agent for an independent salesperson who books loads under a broker's registration. That person is the broker's agent in the plain legal sense: the customer contract, the carrier contract, the invoice and the registration all belong to the broker. Federal law requires the broker, not the freight agent, to provide financial security of $75,000, available to pay claims arising from the broker's failure to pay freight charges. The regulations also require a broker to keep a record of each transaction for three years, including the compensation it received and from whom, and they forbid a broker to represent its operations as those of a carrier.

Freight therefore uses the pair as a firm-and-representative pair, close to the securities usage and far from the insurance one. Neither word says whose side the intermediary is on: a freight broker stands between shipper and carrier and contracts with both.

How are the words used in securities and business sales?

In United States securities law the broker is a registered firm, and the individuals who deal with clients are its associated persons, called agents in many state statutes. The Securities and Exchange Commission's guide to broker-dealer registration explains that a broker acts as agent for others while a dealer trades for its own account, and that individuals who work for a registered broker-dealer, as employees or as independent contractors, generally do not register separately but must be supervised by the firm. State law names those individuals directly: Minnesota's version of the Uniform Securities Act defines an agent as an individual, other than a broker-dealer, who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities.

Business sales sit on that boundary. A business broker who sells the assets of a company is not dealing in securities; once the sale is a sale of shares, securities law is in play, and state licensing rules for business brokers vary. United States federal law now carries a registration exemption for M&A brokers who act in the transfer of ownership of eligible privately held companies, and its conditions read like a definition of what a pure intermediary is. The exemption is lost if the M&A broker receives, holds, transmits or has custody of the funds or securities exchanged by the parties, if it binds a party to the transfer, or if it represents both buyer and seller without written disclosure and written consent from both.

What changes for yachts, and for commercial agents selling goods?

In yacht sales the regulated pair is broker and salesperson, and the word agent usually means something else: the ship's agent who looks after a vessel in port. Florida is one of the few United States states with a dedicated statute. Its Yacht and Ship Brokers' Act applies to vessels that exceed 32 feet in length and are used mainly for pleasure, requires a licence to act as a broker or salesperson, and defines a salesperson as a person employed by a broker to perform the acts of a broker. The broker must post a $25,000 surety bond and the salesperson a $10,000 bond, and the broker must place the funds received in a transaction in a trust account at a Florida financial institution until they are disbursed.

In the sale of goods, the United Kingdom gives the word agent a statutory weight that the word broker does not carry. The Commercial Agents (Council Directive) Regulations 1993 define a commercial agent as a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of a principal, or to negotiate and conclude such sales in the principal's name. Continuing authority is the operative phrase. An intermediary inside the definition gets minimum notice of termination, one month in the first year, two in the second and three from the third year on, and on termination is entitled to compensation unless the contract provides for an indemnity instead, the indemnity being capped at one year's average remuneration.

An intermediary who brings one deal to one seller, the classic broker, has no continuing authority and sits outside those protections.

Who can hold client money, who can be paid directly, and who is liable?

In nearly every regulated industry, the person at the top of the licensing ladder holds the client's money, receives the fee and answers for the people below, whatever that person is called. The table applies the three questions to each industry, with the same jurisdictions as above.

Three points in the table need the detail a cell cannot hold. First, holding money as a fiduciary is not the same as owning it: the New York Insurance Law makes every agent and broker responsible in a fiduciary capacity for all funds received, and forbids mingling them with the intermediary's own funds without the principal's express consent. Second, the securities rule on payment is unusually strict, and the Securities and Exchange Commission's guide puts it in one line: associated persons cannot set up a separate entity to receive commission checks. Third, liability for the goods and liability for the money are separate questions. The federal cargo liability statute places liability for loss or injury to property on the carriers that receive and deliver it and treats a freight forwarder as a carrier; it does not name brokers, whose statutory exposure is the bond for unpaid freight charges.

On contracts, the general rule of agency law, as restated by the American Law Institute, is that an agent who contracts for a disclosed principal is not a party to the contract, and an agent who contracts for a principal the other side does not know exists is.

How does the commission flow differ between a broker and an agent?

A commission reaches a broker from the client or from the deal, and reaches an agent working under that broker from the broker. That single rule produces the layered payment chain most intermediaries know. The worked example below uses round, illustrative figures: a property sold for $800,000, a total commission of 5%, shared equally between a listing brokerage and a cooperating brokerage, in a state with California-style rules.

The other industries move the same kind of money along different paths. The table compares three flows on the same criteria, again with illustrative amounts: the property sale above, a commercial policy with a $12,000 premium and a 15% commission, and a truckload billed to the shipper at $2,500 on which the broker keeps a 15% margin and passes 60% of that margin to its freight agent.

In the first flow the intermediary is paid out of the price by a third party. In the second it takes its commission out of money that belongs to someone else, which is why the fiduciary rules exist. In the third it is paid the whole charge and owes the carrier, which is why the bond exists.

Where one payment has to be shared among parties who are each entitled to be paid directly, for instance two brokerages and a referring broker, a payment router is one way to do it. Shaka is a payment router: each party's share is set as a percentage of the deal and can be signed by each recipient before the client pays, the client pays once, and every party is paid at the same moment in one transaction, with at most 20 recipients. It routes the payment and never holds the funds. It does not change who is allowed to be paid: where the law says a salesperson is paid only by the supervising broker, that rule stands whatever tool carries the money.

Which word should you use for yourself, and what should the agreement say?

Use the word your licence or registration uses, and let the agreement state the facts the word leaves open. A title that the local regulator reserves for a licence you do not hold is a compliance problem before it is a marketing one: a Florida yacht salesperson is not a broker, a Queensland salesperson is not an agent, and a freight agent booking loads under someone else's registration is not the broker of the load.

Where no licence fixes the word, as for many introducers, equipment intermediaries and business finders, the agreement does the work the statute would have done. A fee agreement that answers the questions below leaves little room for a dispute about what you were.

• Whom you represent: the seller, the buyer, both with written consent, or neither, as a pure introducer.
• Whether you have authority to sign or to accept an offer for the client, or only to introduce and negotiate.
• Whether the relationship is one deal or a continuing authority, since in the United Kingdom continuing authority to negotiate sales of goods can bring the commercial agent protections with it.
• Whether you will ever receive or hold money that belongs to the client or to the other side, and in what account.
• Who pays you, at what moment, and whether anyone else is paid through you.
• Under whose licence, registration or bond the activity is carried out, if it needs one.

The last question is the one to settle first when you are starting out. In each licensing ladder reviewed here, the right to be paid by the client and the right to hold the client's money sit with the same licence holder.