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March 26, 2008

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If your account is insured by the Securities Investor Protection Corporation (SIPC, then its protected up to $500,000 in account value, but only in $100,000 of cash. Other than that, if your brokerage house goes under, you're out of luck.

This is not something I know inside and out -- but I don't think it's as bad as it sounds from one of the previous comments. I believe that if the securities are already registered in your name, the brokerage's records are accurate, and the securities/funds are not missing, they typically just get transferred, often to another brokerage. If they are NOT missing, SIPC doesn't kick in and doesn't have to kick in.

Check out:
http://www.sipc.org/how/brochure.cfm

"When SIPC gets involved. When a brokerage firm fails owing customers cash and securities that are missing from customer accounts, SIPC usually asks a federal court to appoint a trustee to liquidate the firm and protect its customers. With smaller brokerage firm failures, SIPC sometimes deals directly with customers."

"In a failed brokerage firm with accurate records, the court-appointed trustee and SIPC may arrange to have some or all customer accounts transferred to another brokerage firm. Customers whose accounts are transferred are notified promptly and then have the option of staying at the new firm or moving to another brokerage of their choosing."

I went to the web site the other day and as far as I can tell Charles Schwab, where I have an IRA, is insured. But TIAA-CREF and Vanguard, where I have the bulk of my retirement money, isn't listed as a member.

Does that mean TIAA-CREF and Vanguard are not insured by SIPC?

If the securities are properly registered in your name, there is no danger to you regardless of how much is in your account or what happens to your brokerage firms. If your securities are held In Common, which is not all that unusual, you are insured by the SIPC for up to $500,000.

Interesting question. I'm by no means an expert on this topic, but Gblogger seems on the right track. If you own a typical stock and bond mutual fund, the value of your investment is the underlying value of the stocks and bonds the fund holds (minus expenses), not the brokerage firm itself. It seems if the firm went under you would be able to still get 95% of your money out of the deal even if they jacked up expense ratios to 5% towards the end of the deal to try and save the company.

If you invested in individual stocks or bonds, it would seem like you wouldn't be affected at all if a firm went under, aside from the hassle of receiving documentation of the shares you own.

Lastly, do most brokerages like Vanguard, Fidelity and others operate with the margins of Bear Sterns? I wouldn't think it would be even close. I could be wrong.

rwh, you're fine.

http://www.sipc.org/who/database.cfm

If you look up both TIAA-CREF and Vanguard Marketing, you'll find they're both in the database.

I am pretty knowledgable on this subject, not much time to elaborate. Vangard and Fidelity are the ideal places to have your money right now IMO. I would not worry about it.
-- good management/businesses
-- your stakes are insured
-- places you could diversify to are not as safe from disruption

"Lastly, do most brokerages like Vanguard, Fidelity and others operate with the margins of Bear Sterns? I wouldn't think it would be even close. I could be wrong."

No you are correct, it's not close. Their business model is much different from BSC/Lehman/MS/MER/GS

Thanks for a great post and comments! I currently have all of my retirement investments at Fidelity, so Jake's comments make me feel better.

Thanks Jason. I don't know what I did wrong the first time, but when I typed in the company names it came up empty.

I agree with all of the above...

The one point to remember, though it will likely never come up with Fidelity and Vanguard, is that SIPC is not a government-backed agency like FDIC.

SIPC is simply an industry association that is backed by pooled funds.

If SIPC can't cover a loss, the government has no obligation to step in.

In my opinion, if Vanguard and Fidelity collapse - for example - I think we'll be at a point where it won't matter WHERE you have your money stashed, because we'll be in full-fledged meltdown mode. I think keeping everything spread between 2-3 brokerages is plenty.

Remember Bear Stearns is not a broker, it is an investment bank.

Well...Bear Stearns has a *prime* brokerage.

http://en.wikipedia.org/wiki/Prime_brokerage

I rather doubt the writer is a hedge fund, though.

Not only do you not need to do this, in most cases you shouldn't. When people spread their money around to multiple brokers in this way, it becomes exponentially harder for them to manage it well. Consider the difficulty in performing annual rebalancing when that includes transfers from one broker to another. With that added difficulty, you are much less likely to perform needed rebalancing.

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