Brokers are licensed intermediaries who connect buyers and sellers, handle the pricing, paperwork, and regulatory steps that make a transaction close, and get paid for it. So the short answer to what brokers do and how they make money: they stand between you and a marketplace you can’t efficiently reach alone, and they earn commissions on transactions, fees for services, markups on trades, interest on money they lend you or hold for you, and in some cases payments from the firms that actually execute your orders.
What a Broker Actually Does for You
The core job is finding the other side of your deal and getting the transaction to settle. In securities markets, that means routing your order to an exchange or market maker, confirming you have the funds, confirming the seller holds the shares, and making sure ownership transfers cleanly. In real estate, it means listing a property, marketing it, screening buyers, and shepherding both sides through inspections, appraisals, and closing. The asset changes. The broker’s value does not: access to a marketplace, and the infrastructure to close inside it.
Electronic trading has compressed much of this to milliseconds for stocks and bonds, but the broker still runs the systems that host the trade, handles clearing and settlement, and keeps the records regulators require. Someone has to verify that each side of the transaction is legitimate, and that someone is the broker.
Securities brokers also owe you what the rules call “best execution.” Under FINRA Rule 5310, a broker must use reasonable diligence to find the best available market for your order so you get the most favorable price under current conditions.1FINRA.org. 5310 Best Execution and Interpositioning Relevant factors include the security’s liquidity, the size of your order, and how many markets the broker checks. A broker cannot simply route orders wherever is most convenient or profitable for the firm.
The Main Kinds of Brokers
The role looks similar across markets, but the licensing, the paperwork, and the pay model shift with the asset.
Securities Brokers
Securities brokers handle stocks, bonds, mutual funds, options, and similar instruments. They provide access to public exchanges like the New York Stock Exchange and Nasdaq, as well as over-the-counter markets for bonds and smaller securities. Full-service firms bundle research, retirement planning, and portfolio management with trade execution. Discount and online brokers focus on low-cost execution with little personalized advice. That split shapes both your fees and the kind of guidance you get.
Real Estate Brokers
Real estate brokers help you buy or sell residential and commercial property: valuation, MLS listings, marketing, negotiation, and closing coordination including title and inspections. A significant change took effect in August 2024 following a landmark settlement involving the National Association of Realtors. Under the new MLS rules, sellers are no longer required to offer compensation to a buyer’s agent through the listing, and buyers must sign a written agreement with their agent before touring homes that spells out exactly how much the agent will be paid.2NAR.realtor. Summary of 2024 MLS Changes Combined commission rates have hovered around 5.3% to 5.5% of the sale price nationally, with wide variation by market.
Insurance Brokers
Insurance brokers shop across carriers to find coverage that fits your risk profile and budget. Unlike a captive agent who represents a single company, a broker works on your side of the table, comparing policy language, premiums, and claim histories. Licensing is handled at the state level, with application and exam fees that typically run between $40 and $100.
Mortgage Brokers
Mortgage brokers sit between you and potential lenders, shopping your loan across banks, credit unions, and wholesale lenders. They don’t fund the loan. They originate the application, gather your documents, and submit it for underwriting. Under the Real Estate Settlement Procedures Act, mortgage brokers must give you a good-faith estimate of settlement costs within three business days of your application and disclose any affiliated business arrangements that could influence their recommendations.3Consumer Financial Protection Bureau. Mortgage Examination Procedures Origination Most states also require mortgage brokers to post surety bonds, generally in the range of $10,000 to $100,000 depending on state and loan volume.
Commodities and Futures Brokers
Futures commission merchants execute trades in commodities, futures contracts, and swaps. They register with the National Futures Association and are overseen by the Commodity Futures Trading Commission, a separate federal regulator from the SEC.4eCFR. 17 CFR 3.10 – Registration of Futures Commission Merchants, Introducing Brokers, and Others Oil futures, agricultural contracts, and currency forwards run through this channel rather than a standard securities broker-dealer.
How Brokers Make Money
Commissions and Transaction Fees
The traditional model is a commission tied to each transaction. Real estate brokers typically earn a percentage of the sale price, with combined rates currently averaging around 5.3% to 5.5% split between the buyer’s and seller’s agents. Securities brokers may charge a flat fee per trade or a percentage-based markup, particularly on bond transactions. Insurance brokers earn commissions from the carrier whose policy you purchase, which is why it matters whether a broker gets different commission rates from different carriers when you’re weighing their recommendation.
Payment for Order Flow
Many online brokerages now charge zero commissions on stock and ETF trades. The money has to come from somewhere, and a major source is payment for order flow. When you place a trade, your broker routes the order to a market maker who executes it. That market maker pays the broker a small amount, typically fractions of a penny per share, for the privilege of filling the order.5U.S. Securities and Exchange Commission. Special Study – Payment for Order Flow and Internalization in the Options Markets Payment for order flow generated an estimated $3.8 billion in revenue for the twelve largest U.S. brokerages in 2021 alone.6U.S. Securities and Exchange Commission. How Does Payment for Order Flow Influence Markets Critics argue it creates tension between routing orders where the broker gets paid the most and where you get the best price. The SEC has scrutinized the practice but has not banned it.
Margin Lending and Cash Sweeps
Brokerages also earn revenue from margin lending, where they lend you money to buy securities using your portfolio as collateral. Rates vary by account size. At one major brokerage, they currently range from 7.50% for balances over $1 million up to 11.825% for balances under $25,000.7Fidelity Investments. Margin Loans Brokers also earn on uninvested cash sitting in your account by sweeping it into money market funds or bank deposit programs and keeping a spread on the rate.
All of these revenue streams are supposed to be transparent. Your broker must provide fee schedules spelling out how they get paid, and under Regulation Best Interest, conflicts created by these compensation structures must be disclosed in writing before a recommendation is made.
The Standard a Broker Owes You
Before Regulation Best Interest took effect in June 2020, brokers operated under a looser “suitability” standard that only required recommendations to be generally appropriate for your financial profile. Reg BI raised the bar.8LII / Legal Information Institute. Regulation Best Interest (Reg BI) Under the current rule, a broker must satisfy four obligations every time they recommend a securities transaction or investment strategy:
- Disclosure. The broker must tell you, in writing, about the scope of the relationship and any material conflicts of interest tied to the recommendation.
- Care. The broker must exercise reasonable diligence and skill, considering the risks, rewards, and costs of the recommendation in light of your specific investment profile.
- Conflict of interest. The firm must maintain written policies to identify, disclose, and mitigate conflicts, especially those created by compensation structures that might tempt a broker to recommend one product over another.
- Compliance. The firm must enforce internal procedures designed to achieve compliance with the three obligations above.9U.S. Securities and Exchange Commission. Regulation Best Interest
The care obligation is where most enforcement lands. A broker cannot simply recommend whatever product pays the highest commission. The recommendation has to reflect a reasonable belief that it serves your interests given your financial situation, and a pattern of excessive trading, even if each individual trade looks defensible, violates the rule.
One boundary worth knowing: a broker is not the same as an investment adviser. An adviser’s job is ongoing personalized financial advice, often with authority to trade on your behalf without calling you first, and an adviser owes you a fiduciary duty under the Investment Advisers Act of 1940 that applies to the whole relationship.10Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers A broker’s Reg BI obligation attaches at the moment of a recommendation, not continuously. The SEC requires both brokers and advisers to give you a Form CRS that lays out the type of relationship, the fees, the standard of conduct, and the conflicts; if a firm is registered as both, it must present both options with equal prominence so you can compare.11Securities and Exchange Commission. Form CRS Instructions If you’re unsure which you’re dealing with, Form CRS is the first place to look.
How to Check a Broker Before You Hire One
Before handing money to any securities broker, look them up on FINRA BrokerCheck at brokercheck.finra.org. The free database shows whether a person or firm is properly registered, their employment history, licensing information, and any disciplinary events, customer complaints, or arbitration outcomes on their record.12FINRA.org. About BrokerCheck A clean BrokerCheck report does not guarantee a good experience, but a report with multiple customer disputes or regulatory actions is a reliable warning sign. This is the single easiest due diligence step most investors skip.
It’s also worth knowing what protection sits behind the account itself. If your brokerage firm fails financially, the Securities Investor Protection Corporation covers the loss of cash and securities in your account up to $500,000, with a $250,000 sublimit on cash.13SIPC. What SIPC Protects SIPC covers stocks, bonds, Treasury securities, mutual funds, and certificates of deposit held in brokerage accounts. It does not protect you against investment losses, bad advice, or a decline in the value of your holdings. Many larger brokerages carry additional excess SIPC insurance through private carriers that extends coverage well beyond the standard limits.
Finally, read the arbitration clause before you sign. Most brokerage account agreements require that disputes go through FINRA arbitration rather than a courtroom. The process begins when you submit a Statement of Claim to FINRA outlining your allegations.14FINRA.org. FINRA’s Arbitration Process Arbitration is faster and less expensive than litigation, but it also limits your ability to appeal. Knowing that this is likely your only recourse is worth the few minutes it takes to read the clause before you open the account.