Headline: What happens if your Broker… well… goes Broke?

Date: 2/8/2021

Body:   I was listening to an article on NPR, and one of the listeners called in and asked, essentially, “What happens to my money if my broker goes BANKRUPT?”   Given the business situation right now (in the throes of the pandemic, and taking a small breath between 2 potentially VERY different Administrations) this seemed like a pertinent question.   The speaker gave a very brief answer, but it seemed important enough for me to take a deeper dive.

OK, first thing first

Breathe, please take a breath.  Your money is most probably secured by a number of safeguards.

So, what is happening behind the scenes?

First, you should realize that the federal government (SEC) has set up rules that these companies have to follow.   For example, these companies  need to keep a certain percentage of their assets liquid in order to account for the occasional market hiccup.  So, even if you have to pull out what seems (to you) to be a large amount of money, you’ll likely be just fine.  Also, with a 401(k), any of the qualified employment plans are covered by the ERISA laws, which are governed by the Department of Labor, so they have a whole other layer of protection.  In addition to the SEC and possibly the Dept. of Labor, FINRA is watching the activities of individual brokers within each firm.   So, there are a lot of watch dogs on this beat.

If your broker goes bankrupt (very rare), it is quite likely that another financial service firm will see it as an opportunity, buy the assets (including your portfolio) and Bob’s your uncle.  All is well, and your account is simply transferred to the new owner.  You are unlikely to see any interruption of service at all.  If there is no buyer for the now, “on sale” assets, there  is SIPC.   SIPC (the government) will insure your account up to $500,000 of securities or $250,000 of cash.  Some people have accounts that are larger than these limits, and you can rest assured that many financial institutions take out extra insurance beyond SIPC, so, these assets are likely insured too. If one is lucky enough to have this issue, one can spread money over several institutions and receive coverage on each tranche of money.    Should it come to a (Wall) Street fight, SIPC has a really good record too.  From its beginning in 1970 to 2017, SIPC fronted $2.8 billion  to help consumers get back $138.7 billion in assets.  In that period, only 349 individuals have not gotten their ENTIRE portfolio back.     But, just the presence of SIPC can be a form of protection.   Said a president of SIPC, “The vast majority of assets are recovered without our funds.”

What does SIPC cover?

SIPC covers many types of securities (e.g. stocks & bonds) as well as other fairly conservative investments.   SIPC does NOT cover futures transactions (usually), and does not cover partnership interests.  Please note that FDIC differs from SIPC in that under FDIC, the entire value of the account is covered   Under SIPC, only the number shares is insured, not the value of the account.  Please note that SIPC does NOT cover loss of assets due to poor investment allocations or decisions.  For this reason, due diligence on your part is necessary before you give money to a broker, and certainly while you have money with that broker.

How to Protect Yourself

First, choose your broker carefully.   Look to see if he/she has any FINRA complaints against them.    Look at the SEC website and see if there are any SEC-actions pending against them.  (This saved my hide.   I was really enthused about potentially working with these 2 entrepreneurs I read about in Inc. magazine.   I looked them up and found that there was an FTC action pending against them.   They came right off my database.) Then, look to see if they are covered by SIPC.   If they are, ask them if they have any coverages in excess of SIPC.  If they mumble, hesitate or rope-a-dope you here, this seems like a red flag.

Once you do decide to place your hard-earned cash in the hands of this broker, be sure to keep organized notes of the transactions that are done.   For certain, you should keep all of the statements sent to you.   Both for tax purposes and in case your broker goes bankrupt, these records are invaluable to regaining your financial position.

So, what should you do if your broker goes bankrupt?

  1.  File a claim with SIPC.   There is a period of time within which you must file a claim, so, file it early.   And that paperwork that you so meticulously kept?   That will serve as a wonderful foundation for your claim against the SIPC protection.  Even if your account is being transferred to another broker, follow directions given you by the court-appointed trustee and file a claim.
  2. If the court-appointed trustee does not contact you, then you can file your own claim form.   Just visit www.sipc.org and you will find the correct form.
  3. If you are not “made whole” by SIPC, you can hire an attorney who can file suit on your behalf.  But this route can be very expensive and take a long time, so be sure to try other approaches.

The Verdict

The long and short of it is that you are likely going to be just fine.   Usually, these bankruptcies are prevented in the first place by federal regulatory bodies or designees.  If there is a bankruptcy or fraud, in the vast majority of cases, the accounts are transferred to another institution and will represent no headache  for you at all.   If it should come down to insurance, SIPC will probably cover the majority of your holdings.  There are other countries where your hard-earned cash might be a waving red flag in front of kleptocrats.    In America, there might be a bull and a red flag, but here, the bolero is protecting both parties. 


What Happens When a Stock Broker Goes Bust? (investopedia.com)

What Happens to Investments If a Broker Goes Bankrupt? (thebalance.com)

How to protect your money if your broker goes belly up – Sep. 15, 2008 (cnn.com)

SIPC Insurance: What It Does and Does Not Protect – NerdWallet

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Leave a comment

Your email address will not be published. Required fields are marked *

Share via
Copy link
Powered by Social Snap