How safe is it to have a brokerage hold your securities in street name?
July 14, 2004 7:21 AM   Subscribe

How safe is it to have a brokerage hold your securities in street name?

My dad, who's fluent in lawyer, took a look at my online broker's terms and conditions agreement and found it to be extremely one sided (in favor of the brokerage). I suppose this is to be expected. But some of the conditions are giving me cause to reconsider the value of my beloved convenience. For example, if I have a debit balance of any size (big or small), the brokerage has the right to loan out everything in my account without my consent. I can understand them loaning out an amount equivalent to my balance owed, but everything? Seems a bit extreme.

So my questions, in addition to the above, are What happens to my holdings if the broker happens to go belly up? Is it measurably safer to have the certificates issued in my name and hold onto them myself (white knuckled in the darkest corner of my basement)? And do the terms and conditions vary at all between brokers, or are they fairly standard across the industry?
posted by crumbly to Work & Money (4 answers total)
IANAFA but pretty much every financial advisor I know tells me the certificats are pretty to look at, but that's about it. It's more of a hassle than anything. If a stock splits you have to exchange your certificates, same if you sell some of the shares.

Stick with a wll known broker like Shcwab and you shouldn't have to worry about them going belly up.
posted by bondcliff at 7:29 AM on July 14, 2004

crumbly: All brokerages should have insurance to cover the assets they hold for their clients. See SIPC for example. It's somewhat like the FDIC and your bank account.
posted by reverendX at 7:30 AM on July 14, 2004

Disadvantages to holding the certificates include not only the stock-split hassle, but also hassles due any kind of reorganization--mergers, spinoffs, tracking stocks, etc. Furthermore, if you marry, divorce, die, or otherwise need to change the registration on the certificates, the transfer agent for each company has different requirements and different hoops for you to jump through. A broker takes car of all of this for you with one form.

If you have a debit balance, you probably have a margin account, and of course the broker will be able to hypothecate your securities. AFAIK, debit balances occurring in cash accounts will not flip the switch at most brokerage firms. So don't sign up for margin.

SIPC has been covered, and furthermore, remember that brokerage firms are required by law to segregate firm assets from client assets.

Last, though Schwab may be a well-known broker, they would not be on my list of firms where I'd feel totally comfortable holding my shares. If you're looking for a discount broker, I strongly suggest you choose Fidelity for a bevy of reasons-- financial strength, low costs, competent reps, commission-free salespeople, etc.
posted by trharlan at 8:37 AM on July 14, 2004

reverendX, I hadn't known about SIPC. Thanks for the info.

trharlan, I've been thinking about moving to a new broker and Fidelity is my first choice. But just out of curiosity, what is it about Schwab that makes you uncomfortable?
posted by crumbly at 9:39 AM on July 14, 2004

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