Broker-dealers make money in several ways at once: commissions and transaction fees on trades, markups and markdowns when they sell you securities from their own inventory, distribution fees paid by mutual funds, payment for order flow from market makers, interest on margin loans and on the cash sitting idle in customer accounts, securities lending income, asset-based advisory fees, and underwriting revenue from corporate finance work. The name itself explains the split: the firm acts as a broker when it executes trades on your behalf and as a dealer when it trades from its own inventory, and federal law requires any firm doing either for customers to register with the SEC and join a self-regulatory organization like FINRA.1Office of the Law Revision Counsel. 15 USC 78o – Registration and Regulation of Brokers and Dealers That dual capacity is what creates so many distinct ways to get paid.
Commissions and Transaction Fees
The most straightforward revenue source is the commission charged each time the firm executes a trade for you. Full-service firms that provide personalized advice and research still charge per trade. Fidelity, for example, charges $32.95 for representative-assisted stock trades.2Fidelity. Fidelity Brokerage Commission and Fee Schedule Discount and online-only firms have largely eliminated commissions on domestic stocks and ETFs, which is why many investors assume trading is free. It isn’t. The cost has shifted to other revenue streams below.
Commissions remain standard for more complex products. Options trades at most firms carry a per-contract fee, commonly around $0.65 per contract.2Fidelity. Fidelity Brokerage Commission and Fee Schedule Secondary-market bond trades often involve a per-bond fee with a minimum charge per trade. These fees cover the more specialized execution work these products require.
Markups and Markdowns on Principal Trades
When a broker-dealer sells you a security from its own inventory instead of finding another seller in the market, the firm adds a markup: the difference between what the security costs on the open market and the higher price you pay. The reverse happens when you sell. The firm buys your security at a markdown below the current market value, and the gap between those prices compensates the firm for the risk of holding inventory and providing immediate liquidity.
You’ll encounter markups and markdowns most often with municipal bonds, corporate bonds, and over-the-counter stocks, products that trade less frequently than shares on major exchanges. Because these securities don’t have the same continuous, transparent pricing as exchange-listed stocks, the spread between the buy and sell price tends to be wider, and the firm’s profit margin on each trade is larger.
FINRA Rule 2121 requires these price adjustments to be fair, taking into account current market conditions, the cost of executing the transaction, and the nature of the firm’s business.3FINRA. FINRA Rule 2121 – Fair Prices and Commissions A markup that isn’t reasonably related to the current market price violates that rule. In practice, “reasonable” leaves room for interpretation, and investors buying thinly traded bonds rarely know the exact wholesale price the firm paid.
Mutual Fund Distribution and 12b-1 Fees
When a broker-dealer sells you mutual fund shares, the fund itself often pays the firm for distribution and account servicing. These payments come out of the fund’s assets, so they never appear on a trade confirmation. The asset-based distribution fee, commonly called a 12b-1 fee, is capped at 0.75% of the fund’s average annual net assets. Funds may pay the broker an additional service fee of up to 0.25% annually for maintaining shareholder accounts.4FINRA.org. FINRA Rule 2341 – Investment Company Securities Combined, that’s up to 1% of your invested balance each year flowing from the fund to the broker, embedded in the expense ratio.
These fees create an incentive to recommend funds with higher 12b-1 charges over cheaper alternatives, which matters given how many no-load index funds with minimal expense ratios are available. FINRA caps total sales charges (front-end loads, deferred loads, and asset-based fees combined) at 6.25% of total new gross sales for funds that pay service fees, limiting how much a firm can extract over the life of your investment.4FINRA.org. FINRA Rule 2341 – Investment Company Securities
Payment for Order Flow
This is the revenue stream that replaced commissions for many retail investors, and it’s the most debated. When you place a stock order through a zero-commission broker, the firm routes your order to a market maker, and the market maker pays the broker a fraction of a cent per share for the right to fill it. Retail orders are attractive because individual investors tend to hold positions longer and trade in smaller, more predictable sizes than institutional traders.
The arrangement keeps your visible trading costs at zero. The open question is whether the market maker gives you a slightly worse execution price than you’d get on an open exchange. SEC Rule 606 addresses this by requiring broker-dealers to publish quarterly reports disclosing where they route orders, the compensation received from each venue, and the terms of any profit-sharing or volume-based payment arrangements.5U.S. Securities and Exchange Commission. Responses to Frequently Asked Questions Concerning Rule 606 of Regulation NMS These reports must stay on a publicly accessible website for three years.
SEC Rule 605 separately requires market centers to publish monthly execution quality statistics, including the percentage of shares that received price improvement and the average amount of that improvement per share.6eCFR. 17 CFR 242.605 – Disclosure of Order Execution Information Comparing a broker’s Rule 606 data with its execution venues’ Rule 605 data lets you evaluate whether the payment-for-order-flow arrangement is costing you money in execution quality. Few retail investors actually do this, which is part of why the practice remains controversial.
Interest on Margin Loans and Uninvested Cash
Interest income is one of the steadiest and largest revenue sources at most broker-dealers. It comes from two places.
Margin Lending
When you borrow against your portfolio to buy more securities, the firm is extending you a margin loan. Federal Reserve Regulation T sets the initial margin requirement at 50%, meaning you must put up at least half the purchase price in cash or eligible securities before the firm lends you the rest.7Federal Reserve Board. Background and Summary of Regulation T The interest rate on that loan is typically several percentage points above the federal funds rate, and the spread between what the firm pays to borrow and what it charges you is pure margin. There’s no fixed repayment schedule, so interest accrues for as long as you hold the leveraged position.
Uninvested Cash Balances
Cash sitting idle in customer accounts is the other half. When you sell a stock and leave the proceeds in the account, or dividends land before you reinvest them, the firm sweeps that money into short-term instruments like Treasury bills or money market funds. The firm earns the prevailing short-term rate and pays you a lower rate, or nothing at all. The difference is called the net interest margin. Individually these balances are small, but aggregated across millions of accounts they represent billions of dollars in investable capital. During periods of higher interest rates, cash sweep revenue can become a firm’s single largest income line.
Securities Lending
Most investors don’t realize that when they hold stocks in a margin account, the broker-dealer can lend those shares to other market participants, primarily short sellers who need to borrow shares before selling them. The borrower pays interest on the loan, and the broker keeps a portion of that income. For hard-to-borrow stocks, lending fees can be substantial.
SEC Rule 15c3-3 governs how this works. The borrower must post collateral equal to or exceeding the value of the borrowed securities, and the agreement must spell out compensation terms and the rights of both parties in writing.8eCFR. 17 CFR 240.15c3-3 – Customer Protection – Reserves and Custody of Securities For securities held in a margin account, the firm generally has the right to lend your shares without asking permission each time. You agreed to that when you opened the margin account.
Some firms also operate fully paid lending programs, where they lend securities held in your cash account (not margin) in exchange for splitting the interest income with you. These programs require a separate written agreement, and the firm must fully collateralize the loan.9U.S. Securities and Exchange Commission. Staff Statement on Fully Paid Lending The typical split is around 50/50 between the firm and the customer. Whether the income is worth the counterparty risk depends on what you own. Lending fees on widely held blue chips are negligible; fees on volatile or thinly traded stocks can be meaningful.
Wrap Fee Advisory Programs
Many broker-dealers have shifted toward asset-based fee models, where the firm charges a single annual fee, typically 1% to 3% of assets under management, that bundles trading, advice, and administrative costs into one charge. Wrap fee programs have become a dominant revenue source at firms serving wealthier clients, because the fee grows automatically as the account value rises without requiring more trades.
Firms that sponsor wrap fee programs must register as investment advisers and deliver a wrap fee program brochure (Form ADV Part 2A, Appendix 1) before or at the time of entering the advisory relationship.10eCFR. 17 CFR 275.204-3 – Delivery of Brochures and Brochure Supplements That brochure discloses what’s included in the fee and what costs remain separate. The appeal for the investor is cost predictability. The risk is paying 1% to 2% annually on a portfolio that doesn’t trade much, which can end up costing far more than occasional commissions would have.
Underwriting and Investment Banking
The institutional side of the business generates income that most retail investors never see directly, but it’s a major part of how large broker-dealers earn. When a company goes public, the broker-dealer acting as underwriter buys the shares from the issuing company at a discount and resells them at the offering price. That “gross spread” is typically between 4% and 7% of total IPO proceeds for mid-sized offerings, though it drops well below that for billion-dollar deals where competition among underwriters pushes the fee down. The same structure applies to debt offerings.
Underwriting carries real risk. The firm commits to buying the entire issuance, and if investor demand falls short, it’s stuck holding unsold securities at a loss. Large offerings are typically shared among a syndicate of underwriters who split both the fees and the risk. Broker-dealers also collect advisory fees on mergers and acquisitions, usually as a percentage of the deal’s total value, for advising on acquisitions, divestitures, and restructurings.
Pass-Through Regulatory Fees and Account Charges
Two small fees appear on nearly every sell transaction and are passed directly through to regulators. The SEC Section 31 fee funds the SEC’s operations and is set at $20.60 per million dollars of covered sales, effective April 4, 2026.11U.S. Securities and Exchange Commission. Section 31 Transaction Fee Rate Advisory for Fiscal Year 2026 On a $10,000 stock sale, that works out to roughly two cents. The FINRA Trading Activity Fee is $0.000195 per share for equities (capped at $9.79 per trade) and $0.00329 per options contract.12FINRA.org. FINRA Fee Adjustment Schedule Tiny on any single trade, but across millions of daily transactions they fund the regulatory infrastructure.
Firms also charge for account-level services. Annual maintenance fees, often $25 to $100, apply to specialized accounts like IRAs or low-balance accounts. Wire transfers typically run $20 to $35 per outbound domestic transfer. When you move your account to another firm through the industry’s automated transfer system (ACATS), the departing firm commonly charges $50 to $150, even though the actual clearing cost is around $0.50 per transfer. Paper statement fees push clients toward electronic delivery. Reorganization fees cover corporate actions like mergers, tender offers, and spinoffs that require manual updates to your account. None of these individually amount to much, but they tend to hit smaller accounts hardest as a percentage of assets.
How to See What You’re Actually Paying
Federal rules require broker-dealers to tell you how they get paid, though you have to know where to look. Every broker-dealer that serves retail investors must prepare and deliver a relationship summary called Form CRS, which discloses services, fees, conflicts of interest, and disciplinary history in a standardized format. The firm must provide it before making any recommendation, opening an account, or placing an order for you, whichever comes first, and must post it prominently on its website.13eCFR. 17 CFR 240.17a-14 – Form CRS
The SEC’s Regulation Best Interest requires broker-dealers to act in your best interest when recommending securities, investment strategies, or account types, replacing the older “suitability” standard that only required a recommendation to be generally appropriate.14FINRA.org. SEC Regulation Best Interest The best-interest standard requires the firm to address conflicts of interest (like the 12b-1 fees and payment for order flow discussed above) rather than simply disclose them. If a firm recommends a higher-cost product when a cheaper equivalent exists, Reg BI creates a basis to challenge that recommendation.
One boundary worth naming: none of this addresses what happens if the firm itself fails. The Securities Investor Protection Corporation covers up to $500,000 per customer in missing securities and cash, with a $250,000 limit on the cash portion, but SIPC protection doesn’t cover investment losses.15U.S. Courts. Securities Investor Protection Act (SIPA) It covers only situations where the firm collapses and customer assets are missing.
Once you know the categories, the fee schedule, Form CRS, and the quarterly Rule 606 report on your broker’s website will tell you which of these revenue streams apply to your account and roughly how much you’re contributing to each.