Brokerage Agreement Definition

by Patrick Gleeson, Ph. D., Registered Investment Adv ; Updated July 27, 2017
A broker and his client.

Three common brokerage agreements are the agreement between an investor and a stock brokerage, between a buyer or seller and a real estate brokerage and between a producer of insurance -- commonly called "the insurance broker" -- and an insurance company. Other brokerage agreements define the contractual relationship between buyer or seller and a broker who offers goods or services. Comparing brokerage agreements in different fields helps define what a brokerage agreement is and what it is not.

The Essence of the Brokerage Agreement

A voluntary contractual agreement may exist between any two parties, including a buyer or seller on the one hand and a broker on the other. The broker facilitates transactions between the buyer or seller and a third party, which may be an airline, an insurance company, an equity fund, a wholesaler, a communications company or any other party engaged in business. Brokerage agreements have certain underlying principles in common. They spell out how the transaction is accomplished and seek to define the relationship by stating the obligations of each party and the limits of those obligations. They usually describe the steps necessary to complete the contemplated transaction, the rewards for doing so -- payments and commissions -- and the penalties for failures to abide by the agreement.

Stock Brokerage Agreement

Contractual agreements between a retail client and a stockbrokerage may differ in detail, but they have important features in common -- the first being an introductory section defining the procedures, customer requirements and broker's fiduciary obligations regarding opening and maintaining an account. Other sections define and limit the broker's obligations to the customer, point out investment risks, detail the margin agreement allowing a customer to buy equities on credit and the option agreement necessary for the customer to trade in options -- a common form of derivative that leverages returns on investment. The concluding sections of these agreements summarize regulatory disclosures and, importantly, the brokerage's right to settle disputes in arbitration.

Real Estate Brokerage Agreements

A seller engaging a broker to sell her property signs an agreement that defines the broker's tasks and obligations, which may include the broker's fiduciary obligation to act in the seller's best interest. Other sections state the broker's commission, spell out regulatory obligations and the procedures both parties agree to follow in the event of a dispute and detail termination procedures. A brokerage agreement between the real estate broker and a buyer spells out the tasks the broker agrees to take to assist the buyer in finding a suitable property, but it may or may not call for the buyer's broker to be compensated beyond a share of the selling commission paid by the seller. It may also include a section defining dual agency, where seller and buyer agree that the broker may act on behalf of both parties.

Insurance Producer Agreement

An insurance producer, commonly called an insurance broker, must sign an agreement similar to Cigna's "Broker and Consultant Agreement" with each insurance company whose products she intends to sell. The agreement defines the obligations of the producer, who may act as an agent of the insurance company or as a broker on behalf of a client. Insurance producer agreements usually define the producer as an independent contractor and require the producer's agreement regarding accounting, payments and commissions; delivery of products; and confidentiality -- as well as the producer's promise to comply with all governing insurance laws and regulations and include a termination clause.

About the Author

Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.

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