If you’ve invested even $1 toward retirement, you most likely hold an account at a brokerage company. You may have accounts with multiple investment companies between your 401(k), IRA and taxable investment accounts.
Hopefully, you work with Fidelity, Schwab or Vanguard — and not a dreaded insurance company or bank. But your financial future depends on the money you’re investing through the company of your choice. What happens if your brokerage company goes out of business?
What Happens to My Money If My Brokerage Company Fails?
A podcast listener recently asked Certified Financial Planner Wes Moss whether to fret about this.
“I’ve woken up many a day over the last 20-something years and thought that same question,” Moss said. “Well, well, well, wait a minute! All this money in a big brokerage company. What happens if something goes wrong? There is no FDIC when it comes to brokerage money.”
Don’t be too spooked by the subject matter of this article. If your investment company goes kaput, your investments are likely safe.
It depends on how you’ve allocated your portfolio and whether the brokerage is a member of the Securities Investor Protection Corporation (SIPC).
The SIPC protects your money up to $500,000, including up to $250,000 in cash. If your brokerage company goes out of business, SIPC, in theory, takes custody of the money and helps you transfer your assets to another investment company.
It’s important to note that the SIPC doesn’t protect your actual investments. If you put 90% of your portfolio into a risky stock that goes to $0, you’ll lose that money for good.
How Does the SIPC Work?
SIPC provides a type of insurance and protection similar to what the FDIC does for banks.
If a brokerage company goes out of business, much like a few of the bank failures we saw in recent years, someone new takes over — often within a day (or over the weekend).
The new person in charge, often a court-appointed individual who works for a large financial or legal firm, is considered the trustee. That person works with the SIPC to recover customer assets and transfer them to another brokerage.
If the brokerage held stocks, mutual funds, ETFs and bonds in your name, the SIPC tries to return those to you via a transfer to another, stable investment company. This happens within days or weeks. You can decide to stay with that company or transfer your assets again to a new shop.
But in case of fraud — if your assets are missing, such as in a Ponzi scheme — SIPC will give you up to $500,000 (including up to $250,000 in cash). But there’s a claim process that can take months.
Your Brokerage Doesn’t Actually Own Your Investments
Have you ever heard the term “401(k) custodian?” Anyone with a 401(k) account may realize that your investments go through a company such as Fidelity, which provides record-keeping, ensures compliance and manages the buying and selling if any takes place.
However, the assets are held in your name. Fidelity doesn’t own those shares of that 2035 target date fund — you do.
That’s the case for any investments you make within a brokerage, whether or not they’re through a 401(k).
“I remember studying this for really years to feel confident about this. So no wonder people worry about this,” Moss said.
“A large brokerage firm – think Vanguard, Fidelity and Schwab. The money you have in your account is not their money. It’s separated. It’s not on their balance sheet.
“So even if the company operationally does something terribly wrong and it goes out of business, it really shouldn’t mean that anything needs to come out of your investment account. It’s your money.
“I feel very comfortable whether you have $1 million or $20 million or $50 million or $100 million in these big institutions, nothing in the world we live in is perfectly guaranteed, but it doesn’t keep me up at night having lots of capital in the big, reputable firms.”
What Are the Chances a Brokerage Company Dies?
Do brokerage companies really go out of business? Absolutely.
Especially during the financial crisis that led to the Great Recession, many of the big banks came under heavy pressure. Clark says you should never invest through a bank’s brokerage arm. But big banks almost always own brokerage companies.
“Some of them did go out of business [during the Great Recession],” Moss said. “And then some of them had to be taken over and rescued or else they would’ve gone out of business. So it’s a very real worry. That has happened. It’ll probably happen again.”
Luckily, “it’s really hard” to find examples where big institutions failed and impacted people’s accounts to the point where individuals lost their money and assets.
“It’s very hard to find examples around that,” Moss said.
Final Thoughts
Make sure to invest through companies that are SIPC members. (You can always check online. But if your company is a reputable name, it’s almost certainly a member.)
Rest easy knowing that your investments are your investments, even if the company through which you hold your assets commits fraud, goes out of business or both.
You’re protected up to $500,000 — and typically, a new custodian will simply transfer your investments to a new company.
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