What If Your Brokerage Firm Goes Bust?

The recent turmoil in the financial markets has many investors worried about their brokerage accounts, and rightfully so. But, just as the FDIC provides a safety net for bank depositors, the Securities Investor Protection Corp. (SIPC) stands ready to help if your brokerage firm goes belly-up. Probably the most important thing to remember about the SIPC, however, is that it does not cover market losses. If you’ve lost a ton of money in the current bear market, the SIPC can’t help as long as your brokerage remains in business.

If your brokerage does fold, however, there’s little reason to despair. Your first layer of protection comes from SEC rules that require brokerages to keep clients’ assets separate from their own, so that investor accounts should remain intact if the broker closes up shop. If the broker has dipped into investor accounts to shore up its own troubled finances, the SIPC will step in to rebuild each investor’s portfolio, putting up as much as $500,000 of its own money to buy securities to match what was lost. It will even replace lost cash, up to a $100,000 limit. Maxing out on SIPC coverage is rare, but if it happens, any amount over the SIPC limits may be covered by the broker’s supplemental insurance policy.

Although the odds are very good that your portfolio will be intact if your broker folds, there are some downsides. The main problem is that you will lose control of your assets for anywhere from a week to several months, or even longer if fraud is involved. The SIPC does not protect you against market losses while you’re waiting to get back in the driver’s seat.