A brokerage house is a financial firm licensed to buy and sell securities for clients, and in most cases for its own account as well. It sits between you and the stock exchanges, executing your orders, holding your investments, keeping the records, and — depending on the type of firm — recommending what to buy or sell. The kind of brokerage you choose determines what you pay, how much help you get, and what legal standard applies when the firm gives you advice.
How the Law Defines a Brokerage
Federal securities law splits the function in two. A “broker” is any person or firm in the business of executing securities transactions for someone else’s account. A “dealer” buys and sells securities for its own account.1U.S. Securities and Exchange Commission. Guide to Broker-Dealer Registration Most brokerage houses do both, which is why regulators generally call them “broker-dealers.” When your firm matches your stock order with another buyer or seller, it acts as a broker and earns a commission. When it sells you shares from its own inventory, it acts as a dealer and profits from the spread between what it paid and what you pay.
Any firm that uses the mail, phone, or internet to execute or solicit securities transactions in the U.S. must register with the SEC under Section 15 of the Securities Exchange Act of 1934.1U.S. Securities and Exchange Commission. Guide to Broker-Dealer Registration It must also join FINRA, the self-regulatory organization that writes and enforces the day-to-day rules governing broker-dealer conduct.2FINRA. What It Means to Be Regulated by FINRA Without both registrations, a firm cannot legally operate as a brokerage.
What a Brokerage Actually Does for You
Executes Your Trades
The core service is filling your buy and sell orders. FINRA Rule 5310 requires every broker-dealer to use reasonable diligence to find the best market for a security so the price you get is as favorable as possible under current conditions.3FINRA. Best Execution This “best execution” duty doesn’t guarantee you the absolute best price. It requires a genuine effort, rather than routing your order wherever pays the firm the most.
Holds Your Assets and Sends Statements
Your brokerage holds your securities and cash, maintains ownership records, and sends periodic account statements. FINRA rules require statements at least once per calendar quarter for any account with a security position, cash balance, or activity during that period, and each statement must include a notice telling you to report errors promptly.4FINRA. Customer Account Statements Active accounts at most firms get monthly statements, but quarterly is the regulatory floor.
Lends You Money on Margin
Most brokerages offer margin accounts, which let you borrow against the value of your securities to buy more. The Federal Reserve’s Regulation T generally requires you to put up at least 50% of the purchase price in your own funds. After that, FINRA Rule 4210 requires you to maintain equity of at least 25% of the current market value of your margin securities, and many firms set “house” requirements higher.5FINRA. Margin Requirements If your equity falls below the maintenance threshold, the firm issues a margin call and can liquidate your positions if you don’t cover it quickly enough. Margin amplifies both gains and losses. A sharp market drop can wipe out more than your original investment.
Produces Research and, Sometimes, Advice
Many firms publish proprietary research, market analysis, and investment recommendations. How much of this you actually get, and whether a human being helps you use it, depends on the type of brokerage you sign up with.
Full-Service vs. Discount Brokerages
Full-service firms pair you with a dedicated financial professional who provides personalized advice, portfolio construction, retirement planning, and sometimes tax strategy input. You’re paying for human judgment. These firms typically charge an annual fee based on the total value of your account, often around 1% of assets under management for portfolios under $1 million, with the percentage usually dropping as account size grows. Some still charge per-trade commissions, but the asset-based model is now the industry standard. Full-service tends to fit investors with larger portfolios, complicated situations, or no interest in making their own decisions.
Discount brokerages run on a self-directed model. You make your own investment decisions using the firm’s trading platform, with little or no personalized advice. Most major online brokerages now charge zero commissions for U.S.-listed stocks, options, and ETFs. They earn revenue through other channels: interest on uninvested cash, fees for margin loans and premium features, and payment for order flow, where market makers pay the brokerage a small fee per share to fill customer orders. The SEC requires firms to disclose their order flow practices. For most retail investors trading common stocks and ETFs, the cost savings of a discount broker easily outweigh the lack of hand-holding.
What Your Brokerage Owes You on Recommendations
When a broker-dealer recommends a specific investment or strategy to a retail customer, federal rules require the firm to act in your best interest and not put its own financial interests ahead of yours.6GovInfo. 17 CFR 240.15l-1 Regulation Best Interest This standard, Regulation Best Interest (Reg BI), took effect in June 2020.
Reg BI imposes four obligations. The firm must disclose all material facts about the relationship, fees, and conflicts of interest before or at the time of a recommendation. It must exercise reasonable care and skill in making the recommendation. It must maintain policies to identify and address conflicts. And it must have compliance procedures to enforce all of the above.7U.S. Securities and Exchange Commission. Regulation Best Interest – The Broker-Dealer Standard of Conduct
Reg BI is not identical to the fiduciary duty that applies to registered investment advisers. An adviser’s fiduciary obligation covers the entire ongoing relationship. Reg BI applies at the moment a recommendation is made. Advisers can manage conflicts through disclosure and informed client consent; broker-dealers must have policies designed to eliminate or mitigate conflicts that create incentives to put the firm first.7U.S. Securities and Exchange Commission. Regulation Best Interest – The Broker-Dealer Standard of Conduct If you’re getting investment recommendations, knowing which standard applies to your account is worth confirming.
Opening a Brokerage Account
Before you can trade, the firm has to collect enough information to service the account and meet regulatory requirements. FINRA’s Know Your Customer rule (Rule 2090) requires every broker-dealer to use reasonable diligence to learn the essential facts about each customer: your identity, financial situation, and who has authority to act on the account.8FINRA. Know Your Customer Expect to provide your name, Social Security number, employment details, income, net worth, investment experience, and risk tolerance.
At or before the start of the relationship, the firm must also give you a document called Form CRS, or Customer Relationship Summary. This is a standardized, plain-language disclosure the SEC requires every broker-dealer and investment adviser to hand to retail investors.9U.S. Securities and Exchange Commission. Instructions to Form CRS Form CRS covers the services the firm offers, the fees you’ll pay, the conflicts of interest that exist, the firm’s disciplinary history, and how its standard of conduct works. It even lists questions you should ask. Reading it before committing to a brokerage is one of the simplest ways to avoid surprises.
Who Regulates Brokerage Houses
The Securities and Exchange Commission is the federal agency with broad authority over the securities markets. It writes the overarching rules, brings enforcement actions, and oversees the self-regulatory organizations that handle daily supervision.10U.S. Securities and Exchange Commission. About the Securities and Exchange Commission
FINRA is the primary self-regulatory organization. It operates as a not-for-profit under SEC supervision, and every broker-dealer that sells securities to the public must be a member. FINRA registers and qualifies individual brokers, examines firms for compliance at least every four years, and has the power to discipline firms and individuals, up to and including barring them from the industry.2FINRA. What It Means to Be Regulated by FINRA You can check any broker’s disciplinary record for free through FINRA’s BrokerCheck tool.
What Happens If the Brokerage Fails
If your brokerage firm becomes insolvent, the Securities Investor Protection Corporation steps in to recover your assets. SIPC coverage protects up to $500,000 per customer for missing securities and cash, with a $250,000 sublimit for uninvested cash.11Securities Investor Protection Corporation. What SIPC Protects In most cases SIPC arranges to transfer customer accounts to a solvent firm so you can keep trading with minimal disruption.
SIPC does not protect you against market losses. If your portfolio drops because the market declines, or because your broker recommended a bad investment, SIPC coverage does not apply. It also does not cover investors who were sold worthless securities.11Securities Investor Protection Corporation. What SIPC Protects It exists for the specific scenario where a brokerage fails and customer assets go missing from accounts.