Brokerage Firms: What They Are and How They Work

Key takeaways

• A brokerage firm is an intermediary that matches buyers and sellers of financial assets and earns revenue through commissions, fees, or asset-based charges.
• Full-service brokerages offer advice and a wide range of services for higher fees (often a percentage of assets under management).
• Discount brokerages and robo-advisors provide lower-cost, often automated trading; many offer free basic stock trades.
• Independent advisers typically follow a fiduciary standard; captive brokers may be limited to selling their employer’s products.
• Choose a brokerage based on the services you need, price sensitivity, and whether you want fiduciary-level advice.

What is a brokerage firm?

A brokerage firm acts as a financial intermediary that facilitates transactions for stocks, bonds, options, and other securities. Brokers connect buyers and sellers, execute trades, and are compensated through commissions, fees, or asset-based charges.

How brokerage firms operate

Markets are fragmented and fast-moving, so brokerages provide matching, execution, and access to markets that individual investors would struggle to reach on their own. Execution may be fully automated (online brokers), assisted by a human (full-service brokers), or managed algorithmically (robo-advisors). Beyond trade execution, brokerages may provide research, financial planning, tax advice, and portfolio management.

Types of brokerage firms

Full-service brokerages

• Offer comprehensive financial services: investment advice, wealth management, estate planning, tax guidance, and research.
• Fee structures vary: per-transaction commissions, or bundled “wrap” fees that typically run around 1%–3% of assets under management (AUM).
• Often cater to higher-net-worth clients and may require minimum account sizes.

Discount brokerages

• Primarily execute trades for clients through automated online platforms.
• Tend to offer lower fees or zero commissions for basic stock trades due to competition and automation.
• May provide tiered premium services for an additional cost.

Robo-advisors

• Use algorithms and portfolio models (often passive, Modern Portfolio Theory–based) to manage accounts automatically.
• Low-cost entry and minimal account minimums; many charge a small advisory fee (commonly 0.25%–0.50% of AUM) if they include human advice.
• Attractive for hands-off investors seeking low fees and diversified, automated portfolios.

Independent vs. captive brokerages

• Independent brokerages (often registered investment advisers, RIAs) are not tied to a single product provider and generally must meet fiduciary duties to act in the client’s best interest.
• Captive brokerages are affiliated with a specific mutual fund, insurance company, or financial institution and typically sell that firm’s products, which can create conflicts of interest.
• Check whether an adviser is held to a fiduciary standard (best-interest duty) or only to the suitability standard (recommendations must be suitable, but not necessarily the best option).

How brokerages make money

• Transaction commissions and trading fees (though many basic trades are now free).
• Account or advisory fees (including wrap fees based on AUM).
• Fees for additional services, such as broker-assisted trades, premium research, margin interest, and account maintenance.
• Revenue-sharing or referral arrangements and, for some online brokers, payment for order flow from exchanges or market makers.

Regulatory note: Retirement Security Rule (fiduciary considerations)

Regulators have moved to strengthen protections for retirement savers by clarifying when advisers must act as fiduciaries. Rules issued in 2024 set higher standards for advice used in retirement accounts, limiting conflicts of interest and, in some cases, restricting products advisers may recommend for retirement savings. Investors should confirm whether advice affecting retirement accounts is given under a fiduciary standard.

Is a full-service broker worth it?

Full-service firms can be valuable for clients with complex financial situations, significant assets, or a strong need for personalized planning. They are generally more expensive than discount or robo options. If you are comfortable making your own investment decisions and want low costs, a discount broker or robo-advisor may be a better fit.

Choosing a brokerage: practical considerations

• Service needs: Do you want hands-on advice, automated portfolio management, or self-directed execution?
• Fees and fee structure: Compare commissions, AUM percentages, wrap fees, and hidden charges (margin interest, transfer fees).
• Fiduciary status and conflicts of interest: Prefer advisers who must act in your best interest, especially for retirement planning.
• Account minimums and available products: Ensure the brokerage supports your desired investments and meets any minimum balance requirements.
• Platform usability and customer support: Look for reliable execution, clear reporting, and access to help when needed.

Bottom line

Brokerage firms range from full-service advisers offering comprehensive financial planning to low-cost online brokers and automated robo-advisors. Understanding the differences in services, fee structures, and fiduciary obligations will help you choose the brokerage that best aligns with your financial goals, complexity of needs, and cost sensitivity.