This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
A brokerage firm is the licensed entity that sits between the trader and the market. It holds the trader's funds, routes the trader's orders, reports the trades to the regulator, and provides the platform and the support. The role is narrower than the marketing suggests. The broker is not a financial adviser, not a tax adviser, not a custodian in the legal sense, and not a counterparty in most cases. The limits of the role are worth understanding.
What a brokerage firm does
The first job is custody. The broker holds the trader's cash and securities in segregated accounts, separate from the broker's own assets. The segregation is required by the regulator, and it means that in the event of the broker's failure, the trader's assets are not part of the broker's estate. The cash is held at a tier-one bank, and the securities are held at a central securities depository or a sub-custodian.
The second job is order routing. The broker receives the trader's order, decides where to route it (to a lit exchange, to a dark pool, to an internaliser), and reports the execution back to the trader. The order execution policy is a legal document that explains the routing logic, and it is worth reading because it tells the trader where the order actually goes.
The third job is reporting. The broker reports the trader's trades to the regulator, withholds tax where required, and provides the trader with an annual statement. The reporting is required by the regulator, and it is the basis of the trader's tax filing.
The fourth job is the platform. The broker provides the trading platform, the chart, the order ticket, the research, and the support. The platform is the trader's primary interface to the broker, and the quality of the platform is one of the main reasons a trader picks one broker over another.
What a brokerage firm does not do
A broker is not a financial adviser. The broker does not assess the trader's risk tolerance, does not construct a portfolio, and does not make recommendations. The research provided by the broker is information, not advice, and the broker is not responsible for the trader's investment outcomes. The trader is responsible for the trader's own decisions.
A broker is not a tax adviser. The broker withholds tax where required and provides the annual statement, but the broker does not advise the trader on tax strategy, on the location of assets, or on the timing of gains and losses. The trader is responsible for the trader's own tax filing.
A broker is not a custodian in the legal sense. The broker holds the assets in segregated accounts, but the broker is not a custodian in the sense of a long-term fiduciary. The broker is a service provider, and the trader can move the assets to another broker at any time. The transfer process is a regulated process, and the broker is required to facilitate it within a defined timeframe.
A broker is not a counterparty in most cases. When a trader buys a stock through a broker that routes the order to a lit exchange, the broker is not on the other side of the trade. The counterparty is the other trader on the exchange. When a broker internalises the order, the broker is the counterparty, and the trader's order is filled at the broker's price. The internalisation is disclosed in the order execution policy, and the trader can request a different routing if the broker offers it.
How the role differs by broker type
The role of a brokerage firm differs by broker type. A full-service broker offers advice, portfolio construction, retirement planning, and a personal relationship, in addition to the core custody, routing, reporting, and platform functions. A discount broker offers the core functions at a lower cost, with no advice and no relationship. A robo-advisor broker offers automated portfolio management, with limited or no human adviser.
The choice of broker type is a choice of how much help the trader wants, and how much the trader is willing to pay for it. The core functions are the same across broker types, and the differences are in the services around the core.
How to evaluate a brokerage firm
The honest evaluation is to check the regulator, the segregation, the order execution policy, the fee schedule, the platform, and the support. The regulator confirms that the broker is licensed and supervised. The segregation confirms that the assets are protected in the event of failure. The order execution policy confirms that the broker is not trading against the trader in undisclosed ways. The fee schedule confirms that the cost is what the broker says it is. The platform confirms that the trader can use it. The support confirms that the broker is reachable when something goes wrong.
Related resources
Where to start
If you are choosing a brokerage firm, our broker comparison lists the regulator, the fee schedule, the account types, and the platform at each broker. Sort by your jurisdiction and the type of brokerage you want, and you should have a shortlist of two or three within a few minutes.