Protections in place
Every business needs one critical thing besides cash: insurance. It not only protects the principals but also the clients. If you’re worried about your broker, figuring out their insurance situation is the logical place to start.
The good news is that brokerage firms must submit to many regulations and agencies to reduce the risk of failure. The United States Securities and Exchange Commission (SEC) also has a Customer Protection Rule. This forces firms to separate firm assets from client assets, on risk of committing fraud by accessing client accounts. The Financial Industry Regulatory Authority (FINRA) also watches closely to make sure brokers follow these rules.
The Securities Investor Protection Corp (SIPC) provides the insurance we spoke about earlier. It helps investors transfer accounts and protect assets should a firm close up shop. This can protect up to $500,000 in cash and securities. Many firms also carry insurance on top of that in the event of financial failure.
When a company undergoes liquidation, the SIPC supervises the process. Meanwhile, the SIPC may also name another brokerage firm that would inherit the clients, with accounts transferred after they are notified.
Contemporary art has outperformed the S&P 500 by 131% for the past 26 years. Join the exclusive platform to invest in million-dollar works by artists like Banksy, Basquiat, and more. Get started today and diversify your portfolio with art.
Learn MoreHow likely is all this?
Not likely, it turns out: about as rare as American banks going under. Even with the three banks that have failed, there are about 4,844 banks across America, according to Money Crashers. (To be clear, that’s banks and not branches, which number in the tens of thousands.)
Put in simple terms, we’ve just seen 1 in about 1,600 banks go down. If the headlines make it seem more like 1 in 16, now you know why: banks that stay solvent don’t make for sexy headlines.
When a brokerage goes bankrupt, it’s often because they’re mediocre to begin with — they take on unnecessary risk, succumb to mismanagement, or get hobbled by a parent company. Think back to when Bear Stearns and Lehman Brothers went under, thanks to overexposure to the subprime mortgage market.
As the SEC later reported, Bear Stearns had a large amount of exposure to mortgage-backed securities. It had “less capital and was less diversified” than its peers, which resulted in lower liquidity. In this case, JPMorgan Chase bought Bear Stearns; in other instances, accounts are transferred to a new firm, as mentioned above.
So what can you do? You’ll want to stop reading the news and start doing research. Make sure your mutual fund company or broker offers SIPC protection and a diverse portfolio and keep all your records in order. The combination of critical information and savvy preparation will ensure secured funds and sound sleep.
Sponsored
Meet Your Retirement Goals Effortlessly
The road to retirement may seem long, but with WiserAdvisor, you can find a trusted partner to guide you every step of the way
WiserAdvisor matches you with vetted financial advisors that offer personalized advice to help you to make the right choices, invest wisely, and secure the retirement you've always dreamed of. Start planning early, and get your retirement mapped out today.