What Is a Brokerage Firm? Types and How Brokerages Make Money

Search Fintrev

Search our guides, reviews and glossary.

A brokerage firm is a financial intermediary licensed to buy and sell securities and other financial instruments on behalf of its clients. When you place an order for stocks, bonds, options, funds or currencies, the brokerage routes it to a market where it can be matched with the other side of the trade, completes the transaction, and holds the resulting assets in your account. In return it earns commissions, fees, spreads or interest. Brokerages differ mainly in how much help they give you and how they charge for it, from full-service firms that manage a client’s entire financial life to apps that do little more than execute orders.

What a brokerage firm does

Buyers and sellers rarely find each other directly: an investor who wants 100 shares has no practical way to locate a seller of exactly that number at an acceptable price. A brokerage gives clients access to exchanges, alternative trading venues and other liquidity sources, and handles what follows the trade: settlement, custody, record keeping and tax reporting.

Three related roles are often blurred:

• Broker: acts as an agent, executing orders for a client’s account and earning a commission or fee. The broker does not take the other side of the trade.
• Dealer: trades for its own account as principal, buying from or selling to clients and earning the difference between its buying and selling prices.
• Broker-dealer: a firm registered to do both. Many large US brokerages are broker-dealers, registered with the Securities and Exchange Commission (SEC) and members of the Financial Industry Regulatory Authority (FINRA).

Individual brokers may work as employees of a brokerage firm or operate as independent agents affiliated with one. The firm is the regulated entity that holds client assets and answers for the conduct of the people who work under it.

How a brokerage firm works

1. Account opening. The client opens a brokerage account, completes identity checks and funds it with cash or transferred securities.
2. Order entry. The client, or an advisor acting with authorization, enters an order specifying the instrument, quantity and order type, such as a market order, a limit order or a stop-loss order.
3. Routing and execution. The firm sends the order to an exchange, market maker or other venue, or fills it internally if it acts as a dealer.
4. Settlement and custody. After execution, cash and securities change hands through clearing systems, and the brokerage records the position in the client’s account.
5. Reporting. The firm issues trade confirmations, periodic statements and tax documents.

With an online broker, the client places the order and the firm’s systems route it. At a full-service firm the mechanics are the same, but an advisor may have identified the opportunity and placed the trade with the client’s authorization.

Types of brokerage firms

Full-service brokerage

Full-service, or traditional, brokerages add portfolio management, financial, estate, tax and retirement planning, research on economic conditions and companies, and access to credentialed advisors. Some also carry products self-directed platforms may not, such as certain bond issues or alternative investments.

Many once charged a commission per trade; many now charge a wrap fee, a single annual charge covering advice, research and trading, commonly 1% to 3% of AUM. Broker-assisted trades on securities other than stocks can still cost as much as $100 at some firms. Full-service brokers often target affluent clients, with account minimums that can begin in the six figures. Merrill Lynch Wealth Management, Morgan Stanley and Edward Jones are well-known examples, and some run a lower-cost self-directed arm.

Discount and online brokerage

A discount brokerage strips the service down to order execution: the client researches and decides alone and enters orders online or through an app. Charles Schwab is often credited with pioneering the model. Competition has since pushed basic stock and ETF commissions to zero at many online brokers, which sell premium research, advanced trading tools or advisor access at extra cost instead. Large names include Charles Schwab, Fidelity Investments and Interactive Brokers, alongside app-based firms such as Robinhood and Acorns.

Robo-advisors

A robo-advisor uses algorithms to build and manage portfolios automatically, usually through passive index strategies grounded in modern portfolio theory (MPT): money is spread across low-cost funds according to the client’s goals and risk tolerance and rebalanced as markets move. Some offer more active approaches or access to human advisors. Minimums can be as low as a few dollars, and advisor access typically costs 0.25% to 0.50% of AUM per year, well below a traditional broker.

Forex and CFD brokers

Currency and contract-for-difference (CFD) brokers give retail traders access to the over-the-counter forex market, usually with leverage. Some act as market makers, quoting prices and taking the other side of client trades; others pass orders to external liquidity providers and charge a commission. If account equity falls below the required margin, the broker can issue a margin call or close positions automatically, a risk cash stock accounts do not have. In the US, retail forex dealers must register with the Commodity Futures Trading Commission (CFTC) and be members of the National Futures Association (NFA), a separate regime from securities brokerage.

Independent vs. captive brokerages

For products such as mutual funds, annuities and insurance, a key question is whether the firm can offer the whole market or only one company’s shelf.

Independent brokerage

An independent firm is not tied to a fund or insurance company, so it can recommend products from many providers. The most common independent model is the registered investment adviser (RIA), strictly an adviser rather than a broker: registered under the Investment Advisers Act of 1940 or with state regulators, it owes clients a fiduciary duty to act in their best interest. Many RIAs place trades through a separate brokerage that holds the assets.

Captive brokerage

A captive brokerage is affiliated with or employed by a mutual fund company or insurer and sells that company’s products. Its representatives may be well trained, but the menu is limited to what the parent offers, which may not be the best choice for the client.

How brokerage firms make money

“Commission-free” describes the price of one service, not the business model. A brokerage can earn revenue from several sources at once:

• Commissions: a charge per trade, quoted per side (each buy or sell) or per round trip (opening and closing).
• Advisory and wrap fees: a percentage of AUM charged annually, usually billed quarterly.
• Spreads and markups: a dealer earns the gap between its buying and selling prices. In forex this is often the trader’s main cost.
• Payment for order flow (PFOF): market makers pay brokers for the right to execute client orders.
• Margin interest: interest on money clients borrow to buy securities.
• Interest on cash: the firm earns interest on uninvested client cash, often keeping part before crediting the client or sweeping it into a bank account.
• Securities lending: lending client shares, where permitted, to short sellers for a fee.
• Fund and product fees: expense ratios on in-house funds, revenue sharing with outside fund companies and sales charges on certain products.
• Account and service fees: transfer, inactivity, wire, paper statement and broker-assisted trade charges, plus exchange and regulatory pass-through fees.

Worked example: comparing costs (hypothetical)

Assume an investor holds a $400,000 portfolio and leaves it in place for one year, with no other fees or fund expenses counted.

• Full-service wrap fee at 1.5% of AUM: $400,000 × 0.015 = $6,000 for the year, covering advice, research and trades.
• Robo-advisor at 0.25% of AUM: $400,000 × 0.0025 = $1,000 for the year.
• Self-directed online broker with $0 stock commissions: $0 in trading commissions, but the investor does the research and planning alone, and the broker may still earn from cash balances or order routing.

Now a forex case, also hypothetical. A broker quotes EUR/USD at 1.0850 bid and 1.0851 ask, a one-pip spread. On one standard lot (100,000 euros), a pip is worth $10 when the US dollar is the quote currency. A trader who buys at the ask and immediately sells at the bid loses $10: that is the spread cost of the round trip, paid once by crossing from ask to bid. If the same broker instead quoted a raw spread plus a $3.50 commission per side, the commission alone would total $7 per round trip before any spread.

Standards of care: suitability, best interest and fiduciary

The obligations a brokerage owes depend on its role and the account type.

• Suitability: the traditional broker standard required recommendations to be suitable for the client’s circumstances, without requiring the best available option. It still applies in some contexts.
• Regulation Best Interest (Reg BI): since June 2020, SEC rules require broker-dealers making recommendations to retail customers to act in the customer’s best interest at the time of the recommendation and to disclose and manage conflicts. It is stricter than suitability but is not the same as an ongoing fiduciary duty.
• Fiduciary duty: investment advisers owe a continuing duty of loyalty and care across the advisory relationship.

For retirement savings, the US Department of Labor issued the Retirement Security Rule, also called the fiduciary rule, in April 2024. It would treat more retirement advice, such as recommending a 401(k) rollover into an IRA, as fiduciary advice under the Employee Retirement Income Security Act (ERISA), requiring a best-interest standard rather than mere suitability. The rule has faced federal court challenges, so confirm its current status before relying on it.

Limitations and risks of using a brokerage

A brokerage provides access and custody, not protection from market losses.

• Account protection has limits. In the US, the Securities Investor Protection Corporation (SIPC) covers customers of member firms up to $500,000, including up to $250,000 in cash, if the firm fails and client assets are missing. It does not cover investment losses or most forex and crypto holdings.
• Conflicts of interest. Revenue from PFOF, in-house funds, revenue sharing or dealer spreads can create incentives that do not match the client’s.
• Execution quality varies. Routing choices affect the price you receive, and a zero commission does not guarantee the best fill.
• Advice costs compound. A percentage fee is charged every year on the whole balance, so over long periods it can consume a meaningful share of returns.
• Jurisdiction matters. Offshore or lightly regulated firms may offer high leverage with weak client-money protections; the regulator of the entity holding your account is the one that counts.

Brokerage firm vs. related terms

• Brokerage account: the account you open at the firm. The firm is the institution; the account is your relationship with it.
• Exchange: the marketplace where orders are matched, such as the Nasdaq. Retail investors usually reach an exchange through a brokerage rather than trading on it directly.
• Trading platform: the software interface a brokerage provides. Some platforms are offered by many brokers, so the same platform does not mean the same firm, prices or protections.
• Financial advisor: a person who gives advice; that person may work for a brokerage, an RIA or both.

Is a full-service broker worth it?

Full-service clients are often high-net-worth individuals with complicated affairs, such as business interests, estate questions, concentrated stock positions or multi-account tax planning, who want an expert coordinating everything. Investors comfortable deciding for themselves, or who mainly need a diversified portfolio, can use an online broker or robo-advisor for a fraction of the cost. On the $400,000 example above, the gap is several thousand dollars a year, justified only if the advice adds more than it charges.

The Bottom Line

Anyone choosing where to trade or invest should compare how a firm charges, which standard of care it owes, and which regulator oversees the entity holding the account. Investors with complex affairs may benefit from a full-service firm, while self-directed investors can use an online broker or robo-advisor for far less. A percentage advice fee pays off only if the advice adds more than it costs.