A broker makes money in more ways than most clients realize. Direct commissions are only one piece of it. Brokers also earn from the spread between buy and sell prices, markups on bonds sold from inventory, payments from wholesale market makers for routing your orders, interest on margin loans and on the cash sitting idle in your account, fees for lending out your shares, ongoing distribution fees paid by mutual funds, and a range of advisory and account charges. Even a platform advertising zero-commission trades collects revenue from several of these channels on every order, so the true cost of using a broker is almost never zero.
Commissions You Can See
The most visible way a broker gets paid is a fee charged when a transaction closes. What that looks like depends 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 for online stock and ETF orders between 2019 and 2020, though 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 you 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 Read those confirmations. They’re the clearest record of what a specific trade cost you.
Real Estate Brokerage
Real estate brokers have traditionally earned a commission of 5% to 6% of the home’s sale price, split between the listing agent and the buyer’s agent, with the seller’s proceeds covering the full amount. A settlement with the National Association of Realtors that took effect in August 2024 changed that structure: 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 if you’re buying, expect to discuss your agent’s pay directly rather than assuming it will come out of the seller’s side.
Insurance Brokerage
Insurance brokers get a percentage of the annual premium you pay, funded by the carrier rather than billed to you. On life insurance, first-year commissions range from roughly 55% to more than 100% of the premium, giving the broker a large upfront payment for placing the policy. In later years the broker earns a renewal commission of about 2% to 5% while the policy stays active. Because these payments are baked into the premium, you never see them as a line item, and that opacity is why some brokers push higher-premium products over cheaper alternatives.
Spreads and Bond Markups
When you place a market order, there’s a gap between the highest price a buyer will pay (the bid) and the lowest price a seller will accept (the ask). Your purchase executes at the ask, your sale at the bid, and the firm handling the order captures the sliver between. On a heavily traded stock the spread might be a fraction of a cent per share, barely noticeable on one trade but substantial across millions of orders daily.
Bond transactions work differently. Instead of 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 firm might acquire a corporate bond at $1,000 and sell it to you for $1,010, pocketing the $10 markup. 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 and not every broker delivers it equally, so execution quality reports are worth reading before choosing a platform.
Payment for Order Flow
When a zero-commission broker accepts your stock order, it usually doesn’t send the order directly to the New York Stock Exchange or Nasdaq. It routes the order to a wholesale market maker such as Citadel Securities or Virtu Financial, and the market maker pays the broker a small fee for the privilege of filling it. This is payment for order flow, and it’s the primary revenue engine behind commission-free trading platforms.
The per-share payments are small, generally $0.001 to $0.005 for equity orders. Multiplied across millions of trades per day, those fractions of a penny produce hundreds of millions in annual revenue. The market maker profits by capturing part of the bid-ask spread on each order, and the broker profits from the routing fee without charging you directly. Whether the execution quality you get from a market maker matches what you’d get on a public exchange is the trade-off regulators continue to debate.
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.5FINRA. About NMS Equity and Options Routing Reports (SEC 606(a) Reports) If you want to know where your orders actually go, that’s where to look.
Interest on Margin Loans and Idle Cash
Lending is quietly one of the most profitable activities at any brokerage, and it takes two forms: margin loans you 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 broker’s profit is the gap between what it pays to source capital and what it charges you, a spread that can be several percentage points wide.
Margin lending carries a liquidation risk many borrowers don’t fully appreciate. 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 That forced sale can lock in losses at the worst possible time.
Cash Sweep Programs
Uninvested cash sitting in your brokerage account doesn’t stay 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 they pass 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 difference is one of the largest revenue streams in the industry.
Federal rules require brokers to hold customer funds in a special reserve bank account and to notify you at least quarterly of any free credit balance. Brokers must also 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 the default at most firms, and few clients realize they could move that cash into a higher-yielding alternative themselves.
Securities Lending and Fund Distribution Fees
Lending Out 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 know your shares are being lent at all.
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, reducing 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. The fee comes quietly out of the fund’s net asset value, which is a significant reason low-cost index funds and ETFs have taken so much market share from actively sold mutual funds.
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 reason to grow your portfolio, since 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.
Account Maintenance and Administrative Charges
Brokerages recover operational costs through flat fees that apply regardless of how much you trade:
- IRA maintenance fees at firms that still charge them run $25 to $35 annually, and many waive the fee if you keep a minimum balance or enroll in electronic delivery.13Vanguard. Vanguard Annual Account Service Fees
- Paper statements can cost $20 or more per year at firms that still offer physical mailings.14MassMutual. MMLIS Schedule of Account Fees – Client Brokerage Accounts
- Inactivity fees still appear at smaller or legacy firms if your account shows no trading activity for 12 months, though the practice has become less common.
- Account transfers through the ACATS system often trigger a transfer-out fee of $50 to $100. The receiving firm sometimes reimburses this cost to attract your business, so ask before you pay.
What This Means for You as a Client
Every revenue stream above creates an incentive that can push 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 give you a Form CRS relationship summary disclosing the firm’s services, fee structures, conflicts of interest, and disciplinary history.16U.S. Securities and Exchange Commission. Form CRS Item Instructions The form even includes the question, “How might your conflicts of interest affect me, and how will you address them?” Ask it.
One boundary 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. If you want a clear picture of what your broker earns from you, read your trade confirmations, pull the Rule 606 report, check the sweep rate against a comparable money market fund, and look at the expense ratios and 12b-1 disclosures on any fund you’re recommended. The revenue is there; it’s just rarely on the invoice.