Comments on: How do I check the 'health' of my brokerage?

Question: How do I check the 'health' of my brokerage?

random1destiny — Mon, 06 Oct 2008 13:58:36 -0800

How can I find out the health of my investment brokerage (like Fidelity.com, E-Trade, etc)? Can brokerages even crash and lose my money like in a bank failure?

Much public focus has been placed on having a bank fail and people not getting their money. I know that in the case of banks, the money is covered up to 100,000 of FDIC coverage and there are sites to look up the health of your bank like http://www.bauerfinancial.com which give banks star ratings based on their current financial stability.

However, what if you have your money in stocks/mutual funds in a place like Fidelity.com or E-Trade? Can these places fail and not be able to pay you back? Are there places that rate how safe/healthy these institutions are?

By: milkrate

milkrate — Mon, 06 Oct 2008 14:06:05 -0800

The Securities Investor Protection Corporation is for when your brokerage fails.

By: Justinian

Justinian — Mon, 06 Oct 2008 15:51:41 -0800

One thing to keep in mind is that if you own stock in, say, General Electric you own part (a very small part) of General Electric. It doesn't matter what brokerage you bought the stock through, your asset is ownership in General Electric, not the electrons on the screen your brokerage is showing you. Now, if your brokerage fails it damn sure can cause a lot of inconvenience and if you have cash rather than stock in your account that's possibly another matter, but if you own stock in a company like GE or Microsoft or whatever, that's an asset like your house or car, independent of where you bought it from.

By: Justinian

Justinian — Mon, 06 Oct 2008 15:54:43 -0800

(note: if you own funds from, say, Vanguard rather than individual stocks then it is the health of Vanguard that most concerns you)

By: random1destiny

random1destiny — Mon, 06 Oct 2008 16:32:21 -0800

Great clarification, Justinian. I'm mainly in the funds, myself. So I wonder if it might make sense to put half in Fidelity funds and half in Vanguard funds to spread the risk.

By: Justinian

Justinian — Mon, 06 Oct 2008 16:55:02 -0800

No problem. Please don't read me as underplaying the amount of inconvenience that you might encounter if your broker goes under, though. It is absolutely worth investigating. Time is money and all that.

By: aga98mtl

aga98mtl — Mon, 06 Oct 2008 17:21:55 -0800

Previously mentionned SIPC covers cash balances up to $100k and stock positions up to $500k. The total amount of coverage is capped at $500k. ex: If you have $500k stock, and $50k of cash, you cant claim the $50k of cash.

However, the stock brokering business is tightly regulated. Typically a broker "fail" before being really insolvent. They fail because SEC requires to maintain a certain amount of capital, not because they are truely insolvent. The customers cash and positions do not suffer any losses that requires a SIPC claim
ex: Lehman brothers, Bear Stearns, NACL.

Also your typical discount brokerage firm does not participate in exotic finance products like the big investment banks did.

All FINRA members (every broker operating in the USA) must provide their most recent statements to their customers upon request.

By: metahawk

metahawk — Mon, 06 Oct 2008 18:32:25 -0800

I bank mostly with Vanguard. I believe each mutual fund is a separate legal entitity (that's why you get all those proxy statements). If a fund makes bad investments, the value of the shares will go down. If investors bail, the need for the fund to get the cash for all those investors cashing in could cause the fund to sell unfavorably and drive the price down some more. (Although I think there is some procedure for orderly liquidation in the prospectus). However, the fund itself actually owns 100% of the shares of the stock or bonds that you are investing in (unless it is something more exotic that allows hedging) so unless an employee has been stealing money, this is mostly market risk on the underlying investment rather than the fund itself going under. So I don't think you really need to worry about the overall health of Vanguard.

Vanguard also carries insurance for accounts that exceed the SIPC limit but I think covers things like employee theft, not market risk.

Someone please correct me if I don't have this right but this is how I convinced myself that there was virtually no risk to have more the SPIC covered amount in the same fund family.