A brokerage firm is a financial intermediary that brings buyers and sellers together. These individuals are trading financial products such as stocks, bonds, and options.
Firms buy the assets on behalf of their clients. The companies tend to hire individual brokers to pool their resources. Most financial services firms have brokerage houses.
There are different types of brokerage firms, with some being full-service as compared to discount.
Full Service Brokerage
These are also known as traditional brokerages. They stem back to the time when financial information was not available to the public.
Full service firms provide a variety of services such as:
These companies tend to either charge a fee for the services and/or a commission on trades. The fee is usually an annual percentage such as 1% of the assets under management.
Full service firms seek out wealthy and affluent clients. They typically have a minimum amount required for investment, such as 6 figures. In exchange, the firm provides high trained and credited professional brokers the clients can have access to.
These firms often offer discount services too.
Examples of traditional brokerage firms:
- Merrill Lynch
- Morgan Stanley
- Edward Jones
Discount Brokerage
This is an online brokerage firm.
Charles Schwab was the first to introduce this in 1995. The firm's automated network is the middleman. Assets are bought and sold as inputted by the investor.
The website became the primary mechanism for these firms, later followed up by applications on a smartphone.
With the explosion of information due to the Internet, many investors did not require the services a traditional brokerage firm offered. This led to discount brokers offering trading only services with low commissions. Over time, they had to tier their services, often charging more for additional features.
Competition caused a continued drop in prices. The prices are now to the point where basic trading has no commissions. Most firms followed suit, choosing to focus growing the assets under management.
Examples of discount brokers:
- Fidelity
- TD Ameritrade
- Robinhood
Robo-Advisors
Technology is bringing a new level of advisor. It is based upon artificial intelligence and algorithms.
A robo-advisor is an app or website that creates an investment portfolio based upon the individual's financial goals. There is no interaction with humans, making the service less expensive to run. This reduces the fees that are charged.
Most of these are programmed to follow long-term passive index strategies which makes that "advice" in line with most long-term goals.
Decentralized Finance (DeFi)
Cryptocurrency has the potential to disrupt the existing financial system. Brokerage firms are not exempt from this.
The digital world brings technology to a new level. FinTech was often incorporated into the business models of established financial institutions.
There were sectors that were disrupted. The traditional banks lose the mortgage origination market as newer, online entrants took over.
None of this compared to what cryptocurrency and blockchain can do to the world of traditional finance. Not only is there the potential for a new monetary system, the ways people access financial services is also changing.
TradFi is full of custodian services. Brokerage firms not only facilitate trades, the client doesn't actually have the assets. With DeFi, it is totally different.
A digital wallet provides the complete ownership. It is accessed through a private key which allows the user access to whatever coins or tokens in the wallet. These can also be non-fungible tokens (NFTs).
Decentralized Finance (DeFi) changes the game by bringing financial services utilizing the wallet as opposed to an account. This allows the users to retain control as there is no custodian.
Since DeFi services are provided without a centralized entity, it removes the counterparty risk that has plagued the traditional financial system at certain times.
Instead of using brokerage services, the system operates on a peer-to-peer basis. Wallets are basically trading with each other when interacting with a decentralized exchange (DEX). Users also can acquire assets by going through liquidity pools (LPs).
Brokerage firms adhere to regulations such as KYC and AML. This is theoretically eliminated with DeFi. This system also eliminates the gatekeepers
Largest Brokerage Firms (By Assets Under Management)
| Brokerage | AUM | Date Report |
|---|---|---|
| Vanguard | $7.2T | Dec-2022 |
| Charles Schwab | $7.05T | Dec-2022 |
| JP Morgan | $2.2T | Sep-2022 |
| E*trade (Morgan Stanley) | $1.3T | Dec-2022 |
| TD Ameritrade | $1T | Sep-2022 |
| Fidelity International | $613.3B | Sep-2022 |
| Interactive Brokers | $337.6B | Jan-2023 |
| Hargreaves Lansdown | £123.8B(~$149B) | 2022 |
| Saxo Bank | DKK 591B (~$79B) | Jun-2022 |
| Interactive Investor | £52B(~$63B) | Jun-2022 |
| Robinhood | $62B | Dec-2022 |
| Swissquote | CHF 52.2B(~$56.6B) | Dec-2022 |
| DEGIRO | €37.7B(~$36.8B) | Sep-2022 |
| eToro | $10B | Dec-2021 |
| IG Group | £3.2B(~$3.8B) | Nov-2022 |