Broker Dealers in the US: A Comprehensive Guide

Broker dealers in the US are a crucial part of the financial industry, playing a key role in facilitating transactions between buyers and sellers. There are over 6,000 broker dealers registered with the Securities and Exchange Commission (SEC) in the US.

To become a broker dealer, one must register with the SEC and meet certain requirements. This includes having a minimum net worth of $1 million and a minimum amount of capital of $250,000.

A broker dealer's primary function is to act as an intermediary between buyers and sellers, providing research, execution, and other services to their clients. They can be involved in a wide range of financial products, including stocks, bonds, options, and mutual funds.

In the US, broker dealers are subject to strict regulations and oversight by the SEC and the Financial Industry Regulatory Authority (FINRA).

A broker-dealer is a person or financial entity trading securities for their own account or on behalf of their clients. They can be a corporation, limited partnership, limited liability company, or general partnership.

Broker-dealers are subject to oversight from regulatory agencies such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). This oversight ensures they operate within the law and maintain high standards of professionalism.

Broker-dealers perform several crucial tasks, including giving clients financial advice, creating liquidity through market-making activities, facilitating trade, disseminating investment research, and helping businesses raise capital. These services are essential to the smooth functioning of the financial markets.

In the US, broker-dealers must comply with the Securities Exchange Act of 1934, which defines a broker as someone who effects transactions in securities for others, and a dealer as a buyer and seller of securities for their own account. Many firms are both brokers and dealers, making them 'broker-dealers'.

The Securities Act of 1933 and the Securities Exchange Act of 1934 are the cornerstones of broker-dealer regulation in the US. These laws ensure transparency and prevent fraud in the primary and secondary markets.

The Securities Act of 1933 applies to IPOs, requiring transparency in documents and financial statements to help investors make informed decisions. The Securities Exchange Act of 1934, on the other hand, applies to the secondary market, preventing fraud in the trading of existing securities between investors.

Here is a list of some of the key broker-dealer regulation laws and rules in the US:

These regulations are enforced by the SEC and other self-regulatory organizations (SROs), such as FINRA, to ensure compliance and protect investors.

The U.S. regulation laws and rules are a complex but essential part of the broker-dealer industry. They ensure transparency, prevent fraud, and protect investors.

The Securities Act of 1933 applies to the primary market, ensuring transparency in documents and financial statements. This helps investors make informed decisions when buying securities.

The Securities Exchange Act of 1934, on the other hand, applies to the secondary market, preventing fraud in the trading of existing securities between investors. It also created the Securities and Exchange Commission (SEC).

Other important laws include the Trust Indenture Act of 1939, which regulates debt securities like bonds, debentures, and notes. The Investment Company Act of 1940 regulates the organization of companies investing, reinvesting, and trading in securities.

Here's a list of some key U.S. regulation laws and rules:

These laws and regulations are in place to protect investors and maintain a fair and transparent market.

To become a SIPC member, you must meet certain requirements. Becoming a member of SIPC is a crucial step in the process of becoming a registered broker-dealer.

SIPC assists investors in receiving compensation if the investment company goes bankrupt or becomes solvent. This is a vital protection for investors.

To become a SIPC member, you'll need to file Form BD and be granted registration by the SEC. This is a necessary step in the registration process.

Here are the key requirements to become a SIPC member:

By following these steps, you'll be well on your way to becoming a SIPC member and providing crucial protection for your investors.

Broker-dealers in the US come in different shapes and sizes, from small and independent to large subsidiaries of giant commercial and investment banks.

There are two main types of broker-dealers: wirehouse and independent broker-dealers.

A wirehouse is a full-service broker-dealer that offers a range of products to its clients and profits from them. They can be small brokerages or leading global institutions.

As you're trying to decide whether you're a broker, a dealer, or a broker-dealer, it's essential to understand the differences between these roles.

A broker is an individual who connects buyers and sellers to facilitate transactions, according to Example 4. They work for customers, helping them buy and sell securities.

Broker-dealers, on the other hand, are in a dual capacity, acting as both brokers and dealers. They buy and sell securities from their own accounts, while also working on behalf of their brokerage company, as described in Example 3.

As a dealer, a broker-dealer buys or sells stocks from their accounts using their own funds, guaranteeing transactions are carried out effectively, quickly, and affordably. They must also monitor their own trades to ensure compliance with all applicable laws and regulations.

The Securities Exchange Act of 1934 defines a broker as being engaged in effecting transactions in securities for others, and a dealer as a buyer and seller of securities for its own account, as mentioned in Example 1. Many firms are both brokers and dealers, making them 'broker-dealers'.

Broker-dealers vary in business size, from small and independent to large subsidiaries of giant commercial and investment banks, as stated in Example 5. The two main types of broker-dealers are wirehouse and independent broker-dealers.

Registered Investment Advisors (RIAs) are required to operate according to the fiduciary standard, which means they must act in the best interest of their clients.

Working with RIAs can offer many benefits, especially because they are held to a higher standard of conduct than broker-dealers.

RIAs are a type of financial manager, one of the two primary categories of investment experts, alongside broker-dealers.

RIAs are obligated to put their clients' interests ahead of their own, which can lead to more trustworthy and reliable financial advice.

Robinhood is a notable example of a brokerage firm that has made waves in the industry. It was founded in 2013 and has since become a major player.

One of its key features is zero-commission trading, which was a game-changer at the time. This has since become the industry norm.

Robinhood also made headlines in January 2018 by listing cryptocurrency. This move showed the company's willingness to innovate and adapt to changing market trends.

Here are some key stats about Robinhood's customer base:

To become a broker-dealer in the US, you'll need to meet some specific requirements. First, you'll need to file Form BD and be granted registration by the SEC.

You'll also need to become a member of an SRO, such as FINRA, which will help you comply with regulatory requirements. Additionally, you'll need to become a member of SIPC, which protects investors in the event of a broker-dealer's bankruptcy.

To get started, you'll need to meet all relevant requirements for the state(s) in which you want to operate as a broker-dealer. This may involve obtaining a license or registration, and ensuring that your staff, or "associated persons", have met the necessary requirements, such as certification, fingerprinting, and declarations of prior prosecutions or criminal records.

Here's a brief overview of the exams you'll need to pass to become a registered broker-dealer:

It's worth noting that you may also need to complete education classes periodically to stay up to date on regulatory matters and new securities offerings and client services.

Broker-dealer fees refer to the charges that a broker-dealer, or financial intermediary, levies on its clients for facilitating securities transactions and providing investment advice. These fees can be a significant portion of the overall cost of investing.

Some brokerage fees are fixed per transaction, a percentage of total sales, or a combination of the two. This means that investors can expect to pay a flat rate for each trade, a percentage of their overall investment, or a combination of both.

Brokerage fees are the primary source of income for broker-dealers, making them a crucial aspect of the financial industry. Some broker-dealers charge clients a percentage of their assets under management, while others bill a flat or hourly rate for the advice they provide.

Working with a full-service broker typically costs 1% to 2% of the total sales or investment. This is because full-service brokers offer a range of services, including tax consultation, portfolio assessment, and research advice.

Online brokerage fees can be significantly lower, with some flat rates as low as $30 per transaction. However, customer service may be limited, and stocks can only be traded without incurring commission fees.

Discount brokerages have more limited product choices and no investment advice, but they provide significantly lower costs than full-service brokers. Transaction charges are typically flat, ranging from under $5 to above $30 per trade.

The largest broker-dealer firms in the US are a force to be reckoned with. Charles Schwab leads the pack with $9.41 trillion in assets under management and 35.6 million active brokerage accounts.

Fidelity Investments and Vanguard are hot on its heels, with Fidelity boasting 51.5 million active brokerage accounts and Vanguard managing $8.6 trillion in assets. These numbers are impressive, to say the least.

Here are the top brokerage firms by AUM and number of accounts, according to the latest data:

Charles Schwab is the largest brokerage firm by assets under management (AUM), with $10.31 trillion in assets as of the end of November 2024. This represents a 21% increase from the end of 2023.

Vanguard is a close second, managing $10.10 trillion in assets as of the end of 2024, a 17% increase from the end of 2023. Vanguard has over 50 million active brokerage accounts.

Fidelity is another major player, with $5.80 trillion in assets under management as of the end of 2024, an 18% increase from the end of 2023.

Here's a comparison of the largest brokerage firms by AUM:

These numbers show that all of the largest brokerages have experienced growth in 2024, with smaller firms like Robinhood and Coinbase posting impressive numbers.

Fidelity boasts the most active brokerage accounts among major firms, with 51.5 million. This is a significant increase from 38.7 million in Q4 2023, representing a 33% change.

Schwab is a close second, with 36.2 million active brokerage accounts in 2024. This is an increase from 34.8 million in Q4 2023, representing a 4% change.

Other notable firms include Robinhood, which has 24.8 million active brokerage accounts, and Coinbase, which has 7.8 million active brokerage accounts.

Here's a table summarizing the largest brokerages by active accounts:

These numbers are based on data from Q4 2023 and 2024, showing a significant increase in active accounts across the board.

Charles Schwab is the largest brokerage firm by assets under management, with a whopping $10.31 trillion in client assets as of the end of November 2024.

It was founded in 1971 and has since grown to become one of the leading investment brokerages in the U.S.

Charles Schwab has a total of 36.2 million investors and offers a wide range of financial products and services, including stock trading, individual retirement accounts, and banking.

The firm is most famous for its full-service brokerage, which has a high-quality web platform and app with many investment options.

Here are some key facts about Charles Schwab:

Charles Schwab's fee structure is also noteworthy, with zero-commission trading for U.S.- and Canadian-listed stocks, ETFs, and options online and mobile trades.

Online options trades have a standard 65-cent-per-contract fee.

The operating expense ratio (OER) fees for actively managed mutual funds at Schwab range from 0.21% to 1.09%, while fees for passively managed mutual funds can range from 0.02% to 0.39%.

Annual portfolio management fees at Schwab start at 0.80% for the Schwab Wealth Advisory account, and decrease for clients with higher asset levels.

Charles Schwab also offers a robo-advisor service called Intelligent Portfolios, which provides clients with an automated experience and access to a series of ETFs that rebalance per the client's investment goals.

The service requires a minimum $5,000 investment and comes with no advisory or commission fees.

In November 2019, Charles Schwab announced the acquisition of TD Ameritrade in a stock transaction valued at approximately $26 billion.

The last client account from TD Ameritrade was migrated to Schwab in May 2024.