Is Your Money Safe with a Broker?

A couple months ago was discussed whether or not your money would be safe if a broker's business went under. Kiplinger's recently commented on this issue and I thought it would be worthwhile to share their thoughts. The summary:

Is your money safe [with a broker in financial trouble]? The answer is, almost certainly yes.

To protect investors, federal law requires that brokers segregate customer assets from their own. When bankruptcy appears inevitable, the Securities Investor Protection Corp. steps in. In most cases, it transfers customer accounts to a healthy brokerage before a sick one declares bankruptcy so that investors retain control over their assets.

If the brokerage is already insolvent, SIPC puts bankruptcy proceedings on hold while it replaces securities or other assets missing from clients' accounts. It covers losses of up to $500,000 per account, including up to $100,000 in cash. Many brokers also carry supplemental insurance.

So, for the most part, it appears you're covered in case of a broker's business failure. I'll add that an extra measure of security can be attained by going with brokers like Vanguard or Fidelity that are pretty solid financially.

Comments

[F. Morana]

The safety or non-safety of holding assets through a broker is not, in my view, a function of the broker's solvency or insolvency, but rather, a function of the systems that the broker implements to protect clients from fraud.

Unfortunately, one has no real way of assessing the quality of these systems until a breach actually occurs.

Do you remember how one major brokerage compromised the e-mail addresses of its 6.3 million customers in July 2007? That they did not report it until two months later, and then had the effrontery to suggest that the theft did not involve Social Security data, even though the Social Security data was contained within the very same database? How the matter was so skillfully contained with respect to the media, that it eventually became a non-issue, and most clients just took it on the chin?

[Lord]

While your account is safe from fraud, if you authorize the broker to trade as he sees fit and don't monitor it, don't expect it to cover the losses.