A broker makes money through several channels at once: commissions on trades, the spread between the price you pay and the price the market offers, routing fees paid by wholesale market makers, interest on margin loans and uninvested cash, income from lending out your shares, distribution fees from mutual funds, and ongoing advisory or account charges. Even a platform that advertises “zero-commission” trading collects from most of these sources on every order, which is why the real cost of using a broker is almost never zero.
Commissions on Transactions
The simplest way a broker earns is by charging a fee each time a deal closes. The size and visibility of that fee depend on the type of broker.
Stock and Securities Trades
Full-service stockbrokers historically charged a flat dollar amount per trade, often $5 to $10. Most major discount brokerages eliminated per-trade commissions on online stock and ETF orders between 2019 and 2020, but full-service firms and certain specialized accounts still charge them. Whether or not a commission is visible, federal rules require every broker-dealer to send a written confirmation after each trade disclosing any compensation the firm received and whether it acted as your agent or traded from its own inventory.1eCFR. 17 CFR 240.10b-10 – Confirmation of Transactions
Real Estate Brokers
Real estate brokers have traditionally earned 5% to 6% of a home’s sale price, split between the listing agent and the buyer’s agent, with the seller’s proceeds covering the full amount. That changed in August 2024, when a settlement with the National Association of Realtors took effect. Sellers are no longer required to offer compensation to the buyer’s agent through the MLS, and buyers must sign a written agreement with their agent specifying compensation before touring homes. Commissions remain negotiable, and early data suggests total rates haven’t dropped dramatically, but buyer-agent fees are now a separate negotiation rather than an automatic deduction from the seller’s side.
Insurance Brokers
Insurance brokers earn a percentage of the annual premium, paid by the carrier rather than billed to you. On life insurance, first-year commissions range from roughly 55% to over 100% of the premium, giving the broker a large upfront payment for placing the policy. In subsequent years the broker earns a renewal commission of about 2% to 5% as long as the policy stays active. Because these payments are built into the premium, you never see them as a separate line item.
Spreads and Bond Markups
When you place a market order for a stock, there’s a gap between the highest price a buyer will pay (the bid) and the lowest a seller will accept (the ask). Your purchase executes at the ask, your sale at the bid, and the firm handling the order can capture the sliver in between. On a heavily traded stock the spread might be a fraction of a cent per share, barely noticeable on a single trade but substantial when multiplied across millions of orders a day.
Bonds work differently. Rather than matching buyers and sellers on an exchange, a broker buys a bond into its own inventory and sells it to you at a higher price. A broker might acquire a corporate bond at $1,000 and sell it to you for $1,010, keeping the $10 markup as compensation. FINRA Rule 2121 requires these markups to be fair and reasonable based on the prevailing market price.2FINRA. FINRA Rule 2121 – Fair Prices and Commissions Unlike a visible commission, the markup isn’t broken out on your trade confirmation. The price you pay simply reflects it, which makes bond costs harder to evaluate than stock commissions.
Some brokerages partially offset spread costs through price improvement, which happens when your order executes at a better price than the best publicly quoted bid or offer. Fidelity reported saving investors over $1.94 billion through price improvement in 2024.3Fidelity Investments. Commitment to Execution Quality The benefit varies by order size and market conditions, which is why execution quality reports are worth reading before choosing a platform.
Payment for Order Flow
When a zero-commission broker accepts your stock order, it doesn’t send it directly to the New York Stock Exchange or Nasdaq. It routes the order to a wholesale market maker, a firm like Citadel Securities or Virtu Financial, that pays the broker a small fee for the right to fill it. This arrangement is called payment for order flow, and it’s the primary revenue engine behind commission-free trading platforms.
Per-share payments are tiny, generally $0.001 to $0.005 for equity orders. But when a platform processes millions of trades a day, those fractions of a penny produce hundreds of millions in annual revenue. The market maker earns by capturing a portion of the bid-ask spread on each order, while the broker earns from the routing fee without charging you directly.
Federal rules require brokers to publish quarterly reports showing which market makers they route orders to, how much compensation they receive, and the terms of those arrangements.4U.S. Securities and Exchange Commission. Responses to Frequently Asked Questions Concerning Rule 606 of Regulation NMS These Rule 606 reports are free to access on each broker’s website and must be kept available for three years.5FINRA. About NMS Equity and Options Routing Reports (SEC 606(a) Reports) If you want to see where your orders actually go, those reports are the place to look.
Interest Income
Lending is quietly one of the most profitable activities at any brokerage, and it takes two forms: margin loans you explicitly request and cash sweeps you probably didn’t think about.
Margin Lending
A margin account lets you borrow against your existing securities to buy more. Under Federal Reserve Regulation T, you can borrow up to 50% of the purchase price of eligible securities.6U.S. Securities and Exchange Commission. Margin – Borrowing Money to Pay for Stocks The broker charges interest on that loan at rates tiered by balance size. At Fidelity, a margin balance under $25,000 currently carries a rate of 11.825%, while balances above $1 million drop to 7.50%.7Fidelity Investments. Margin Loans The firm’s profit comes from the gap between what it pays to source capital and what it charges you, a spread that can be several percentage points wide.
Margin also carries liquidation risk. If your account value drops below the minimum maintenance requirement, the broker can sell your securities to cover the shortfall. Firms are not required to notify you before liquidating, they don’t have to let you choose which positions get sold, and they can sell enough to pay off the entire margin loan rather than just the amount needed to meet the call.8FINRA. Know What Triggers a Margin Call
Cash Sweeps
Uninvested cash doesn’t sit idle from the broker’s perspective. Most firms automatically sweep that cash into affiliated bank accounts or money market vehicles, where the firm earns interest at or near prevailing market rates. The share passed back to you is often negligible. Schwab pays just 0.01% APY on uninvested brokerage cash, while its money market funds yield over 3%.9Charles Schwab. Cash Investments – Sweeps, CDs, Money Market Funds and More The broker keeps the difference. Across billions of dollars in aggregate client cash, that gap is one of the largest revenue streams in the industry.
Federal rules require brokers to hold customer funds in a special reserve bank account, to notify you at least quarterly of any free credit balance, and to obtain your written consent before enrolling your cash in a sweep program.10eCFR. 17 CFR 240.15c3-3 – Customer Protection – Reserves and Custody of Securities In practice, sweep enrollment is a default setting at most firms, and few clients realize they could move that cash into a higher-yielding alternative on their own.
Securities Lending and Fund Fees
Lending Your Shares
If you hold stocks in a brokerage account, the firm may lend those shares to short sellers or other institutional borrowers and collect a fee for doing so. Some brokerages offer a fully paid securities lending program that splits the income with you. Schwab divides the interest earned on lent securities 50/50 with clients who opt in, though eligibility requires at least $100,000 in household assets.11Charles Schwab. Getting Income from Fully Paid Securities Lending At firms without an explicit lending program, the broker keeps all of the lending income generated from your holdings, and you may not realize your shares are being lent out.
12b-1 and Distribution Fees
When a broker recommends a mutual fund, the fund company often pays the broker an ongoing distribution fee known as a 12b-1 fee. These fees are deducted from fund assets, which means they reduce your returns rather than appearing on a separate bill. The maximum is 0.75% per year for distribution costs, plus an additional 0.25% for shareholder service fees.12Investor.gov. Distribution and/or Service (12b-1) Fees On a $100,000 mutual fund holding, that combined 1% fee amounts to $1,000 per year flowing from your account to the broker and fund company.
Advisory and Account Fees
Assets Under Management
Brokers who provide ongoing portfolio management charge an annual fee based on the total value of assets in your account. The median fee for a human financial advisor is about 1% of assets per year, while robo-advisory services charge considerably less, often 0.25% to 0.50%. The fee is deducted quarterly from your account balance. This model gives the broker a financial reason to grow your portfolio because a higher balance means a higher fee, but it also creates an incentive to encourage you to move more money under their management whether or not consolidation actually benefits you.
Maintenance and Administrative Charges
Brokerages recover operational costs through flat fees that apply regardless of how much you trade:
- Annual IRA maintenance fees run $25 to $35 at firms that still charge them. Many waive the fee if you maintain a minimum balance or enroll in electronic delivery.13Vanguard. Vanguard Annual Account Service Fees
- Opting out of electronic delivery can cost $20 or more per year at firms that still offer paper statements.14MassMutual. MMLIS Schedule of Account Fees – Client Brokerage Accounts
- Some brokers charge an inactivity fee if your account shows no trading for 12 months. This has become less common across the industry but still appears at smaller or legacy firms.
- Moving your account to another brokerage through the ACATS system often triggers a transfer-out fee of $50 to $100. The receiving firm sometimes reimburses this cost to attract your business, so ask before you pay.
Why the Revenue Model Matters for the Advice You Get
Every revenue stream above creates an incentive that can pull a broker’s recommendation away from what’s best for you. A broker earning payment for order flow benefits from frequent trading. One collecting 12b-1 fees benefits from steering you toward higher-cost mutual funds. One earning margin interest benefits from you borrowing more than you need.
Since June 2020, broker-dealers have been subject to Regulation Best Interest, which requires them to act in your best interest at the time they make a recommendation without placing their own financial interest ahead of yours. The rule imposes specific obligations around disclosure, care in evaluating recommendations, written conflict-management policies, and compliance procedures.15U.S. Securities and Exchange Commission. Regulation Best Interest – The Broker-Dealer Standard of Conduct
Every broker-dealer must also hand you a Form CRS relationship summary, a short document disclosing the firm’s services, fee structures, conflicts of interest, and disciplinary history.16U.S. Securities and Exchange Commission. Form CRS Item Instructions One distinction worth knowing: Regulation Best Interest is not a fiduciary standard. A registered investment adviser owes you an ongoing duty to monitor your account and act in your interest at all times. A broker-dealer’s obligation applies only at the moment a recommendation is made, with no duty to monitor afterward. Knowing how your broker gets paid is the practical way to read any recommendation they give you.