What Happens to Your Investments If Your Stock Broker Goes Bankrupt?

Brokerage failures happen every few decades so it's best to know the downside

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In today’s difficult economic landscape we have witnessed some of the most notable and long-standing financial institutions fall by the wayside. Institutions that carried a great deal of financial clout have partnered with other firms in an effort to remain competitive or in some cases remain viable. Naturally, if you have money with any brokerage firm, you may be asking yourself if your money is truly safe.

The bigger question is exactly what happens when a brokerage firm suddenly goes bust and they were holding your stocks, bonds, mutual funds, and other securities.

The short answer is that brokerage firms are under a watchful eye as to the commingling of their investor's funds with the firm's money.  In other words, firms are required to segregate client assets from firm assets.  Accessing client accounts would be committing fraud. This means, in most cases, that your money should be fine.

Still, what if your firm commits fraud?  To tackle that, regulators have added a layer of protection because some firms have been less than forthright.

Which of Your Investments Are Protected?

The Securities Investor Protection Corp (SIPC) protects clients cash and securities, such as stocks and bonds that are held at troubled financial firms.  However, commodity contracts, limited partnerships, and fixed annuities contracts are ineligible for SIPC protection.

You need to understand that there are limits per customer account that the SIPC may cover up to $500,000 of which $250,000 may be in cash. Therefore, you should check to make sure the firm you are dealing with is a member of SIPC. Practically all national firms of repute are members but it only takes only a few minutes to verify this, so it's worth the effort.

Many firms have their own supplemental insurance, as well, which covers client assets in the event of a financial failure. Additionally, firms are required to have a net capital reserve.

Be Diligent About Your Investment Portfolio

No one is ever going to care about your financial health and security more than you do. Even if you have an ethical broker that you have a long-standing relationship with, it's incumbent upon you to do your due diligence. It is always a good idea to maintain organized records of your securities and your accounts as this will help you should the brokerage firm you are dealing with go out of business. You might just need those account statements to prove that you own what you say you own should you ever become the victim of a brokerage firm failure. Remember, you may know and respect your broker but he or she may be in the dark about the firm's financial health.

Alternatively, you can hold your assets directly through something such as the direct registration system or you can set up a custody arrangement with a very strong bank trust department. Both of these options will safeguard you and your money against an unforeseen disaster.