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

What Happens to My Stocks if My Broker Goes Bankrupt?
What happens to your stocks if your stock broker goes bankrupt? It depends. For most people, SIPC insurance should kick in and replace a big portion of your portfolio but you need to understand the limits to best protect your family. White Packert / The Image Bank / Getty Images

In today’s difficult economic landscape we have witnessed some of the most notable and long standing institutions fall by the wayside.  Institutions that carried much in the way 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 ask yourself how safe your money is.  What happens, exactly, when a brokerage firm goes bust and they were holding your stocks, bonds, mutual funds, and other securities?

The short answer: Brokerage firms are under a watchful eye as to the commingling of investor funds with firm monies.  Firms are required to segregate client assets from firm assets.  Accessing client accounts would be committing fraud.  This means, in most cases, your money should be fine.

Still, what if your firm commits fraud?  Regulators added a layer of protection since some firms have been less than forthright.

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.  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.  Check to make sure the firm you are dealing with is a member of SIPC.  Practically all national firms of repute are but it will take only a few seconds to verify so it's worth doing.

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.

It is a good practice 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 you own what you say you own if you ever become the victim of a brokerage firm failure.

Alternatively, you can hold your assets directly through something like the direct registration system or setup a custody arrangement with a very strong bank trust department.