What Is a Brokerage House? Services, Types, and Standard of Care

A brokerage house is a financial firm licensed to buy and sell securities for clients, and often for its own account as well. It connects you to stock exchanges like the New York Stock Exchange and Nasdaq, executes your trades, holds your investments, and — depending on the type of firm you pick — either advises you on what to buy or simply carries out the orders you place yourself. The kind of brokerage house you choose determines what you pay, how much guidance you get, and the standard of care the firm owes you when it recommends an investment.

What a Brokerage House Actually Does

Federal securities law splits the job into two roles. A “broker” executes securities transactions on someone else’s behalf. A “dealer” buys and sells securities for its own account.¹ Most brokerage houses do both, which is why regulators call them broker-dealers. When your firm fills a stock order by matching you with another buyer or seller, it earns a commission as a broker. When it sells you shares out of its own inventory, it profits from the spread as a dealer.

To operate legally in the United States, a firm has to register with the SEC under Section 15 of the Securities Exchange Act of 1934 and join FINRA, the self-regulatory organization that writes and enforces the day-to-day conduct rules.¹² Any firm handling securities transactions for the public without both registrations is operating outside the law. Before you fund an account, you can look up the firm and any individual broker for free through FINRA’s BrokerCheck.

The Services You Get

Executing Your Trades

The core function 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 receive is as favorable as possible under current conditions.³ This is the “best execution” obligation. It doesn’t promise you the absolute best price on any given trade, but it does require a genuine effort rather than routing your order wherever pays the firm the most.

Holding Your Assets and Sending Statements

Your brokerage holds your securities and cash, tracks ownership, and sends 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, along with a notice telling you to report errors promptly.⁴ Most firms send monthly statements for active accounts, but quarterly is the regulatory floor.

Margin Lending

Many brokerages let you open a margin account, which lets you borrow against your existing 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. Once you hold the position, FINRA Rule 4210 requires equity of at least 25% of the current market value, and many firms set their own “house” requirement above that floor.⁵

Fall below the maintenance level and you get a margin call. You generally have up to 15 business days to deposit cash or securities, but firms can and do liquidate positions sooner if the shortfall is severe.⁵ Margin amplifies gains and losses in both directions, and a sharp drop can leave you owing more than you originally put in.

Research and Recommendations

Many firms produce their own research reports, market commentary, and investment recommendations. How much of that you actually get depends on whether you use a full-service or a discount brokerage.

Full-Service vs. Discount Brokerages

Full-service firms pair you with a dedicated financial professional who builds a portfolio for you, offers retirement and estate planning input, and sometimes weighs in on tax strategy. You’re paying for human judgment and ongoing attention. Fees usually run around 1% of assets under management annually for portfolios under $1 million, with the percentage typically dropping as account size grows. This model tends to fit investors with larger portfolios, more complicated financial situations, or no interest in making their own decisions.

Discount and online brokerages run on a self-directed model. You make the calls; the firm supplies the platform. Most major online brokerages now charge zero commissions on U.S.-listed stocks, options, and ETFs. They earn revenue from interest on uninvested cash, fees on features like margin, and payment for order flow, where market makers pay a small amount per share for the right to fill customer orders. The SEC requires disclosure of order flow practices. For most retail investors trading common stocks and ETFs, the savings outweigh the lack of personalized advice.

What Standard of Care Applies When Your Brokerage Recommends an Investment

When a broker-dealer recommends a specific investment or strategy to a retail customer, Regulation Best Interest requires the firm to act in your best interest and not put its own financial interests ahead of yours.⁶ Reg BI has been in effect since June 2020. It requires the firm to disclose material facts about the relationship, fees, and conflicts; to exercise reasonable care in making the recommendation; and to maintain compliance policies that identify and address conflicts of interest.⁷

Reg BI is not the same as the fiduciary duty that governs registered investment advisers. A fiduciary obligation covers the entire ongoing advisory relationship. Reg BI attaches at the moment a recommendation is made. Advisers can generally 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.⁷ If you’re getting recommendations from a full-service firm, knowing which standard applies to your account is worth confirming in writing.

Opening an Account and Form CRS

Before you can trade, the firm must collect enough information to service the account and satisfy regulators. FINRA’s Know Your Customer rule (Rule 2090) requires reasonable diligence in learning the essential facts about each customer, including your identity, financial situation, and who has authority over the account.⁸ In practice you’ll 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 give you Form CRS, a standardized plain-language Customer Relationship Summary the SEC requires from every broker-dealer and investment adviser serving retail investors.⁹ It covers the firm’s services, fees, conflicts of interest, disciplinary history, and standard of conduct, and it even includes suggested questions to ask. Read it before signing.

If Your Brokerage Fails

If the firm itself becomes insolvent, the Securities Investor Protection Corporation steps in. SIPC coverage protects up to $500,000 per customer for missing securities and cash, with a $250,000 sublimit for uninvested cash, and it typically arranges to transfer customer accounts to a solvent firm so you can keep trading.¹⁰

SIPC does not cover market losses. If your portfolio drops because the market drops, or because a broker recommended a bad investment, SIPC does not apply. It also does not cover investors who were sold worthless securities.¹⁰ The coverage exists for the specific scenario where a brokerage fails and customer assets go missing.

Tax Reporting You’ll Deal With

Your brokerage reports certain transactions to both you and the IRS. When you sell securities for cash, the firm files Form 1099-B reporting the proceeds from each sale.¹¹ For securities purchased after cost basis reporting rules took effect (starting in 2011 for stocks), the firm also reports your adjusted cost basis and whether the gain or loss is short-term or long-term. You should receive the form by mid-February for the prior tax year.

Watch the wash sale rule if you trade actively. Sell a security at a loss and buy a substantially identical security within 30 days before or after the sale, and you cannot deduct that loss. The disallowed loss gets added to the cost basis of the replacement shares. Most brokerages track wash sales within a single account automatically, but they generally cannot track them across accounts at different firms. If you trade the same securities at more than one brokerage, tracking and reporting those wash sales is on you.

1
U.S. Securities and Exchange Commission. Guide to Broker-Dealer Registration
2
FINRA. What It Means to Be Regulated by FINRA
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FINRA. Best Execution
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FINRA. Customer Account Statements
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FINRA. Margin Requirements
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GovInfo. 17 CFR 240.15l-1 Regulation Best Interest
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U.S. Securities and Exchange Commission. Regulation Best Interest – The Broker-Dealer Standard of Conduct
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FINRA. Know Your Customer
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U.S. Securities and Exchange Commission. Instructions to Form CRS
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Securities Investor Protection Corporation. What SIPC Protects
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Internal Revenue Service. About Form 1099-B, Proceeds from Broker and Barter Exchange Transactions