What If My Online Broker Goes Bankrupt?
I am a big advocate of the Internet as indicated by the fact that I’m here writing this blog. I have in recent posts discussed everything from using the Web to get the best credit card and mortgage rates to waiting until Cyber Monday to purchase gifts online but Rich Duprey has recently penned up a post that even got me to stop in my proverbial tracks.
What happens if your online broker goes broke? Hmm, that’s a scary thought on its own but even worse when you take recent events into consideration. E*Trade (Nasdaq: ETFC) investors watched as their shares dropped nearly 60% in one day because of an analyst’s suggestion that the brokerage firm’s subprime mortgage exposure may lead to a run on accounts.
Rich goes on to present the following advice:
Make sure your broker is a member of the Financial Industry Regulatory Authority, which requires members to carry SIPC insurance. The U.S. Securities Investor Protection Corp. is a federally chartered private corporation that protects investors from their brokers going bankrupt, just like the FDIC protects your bank deposits.
Maintain good records. Make sure you’re receiving timely statements from your broker and that they’re accurate. While the SIPC covers you for $100,000 in cash and $500,000 total, you need to prove to the SIPC what you’re owed. They’ll compare what you submit with what’s in the broker’s books. And, no, you can’t get around the $500,000 limit by opening multiple accounts unless the accounts are in “separate capacities” (e.g., opening up an account in your name, a trust account, or a joint account). So says the Interactive Brokers (Nasdaq: IBKR) website.
If you’re nervous about having all your money tied up with one brokerage, spread your money across multiple brokerages while staying under the $500,000 limit on each account.
Find out if your broker carries insurance above and beyond the SIPC insurance. E*Trade, for example, claims additional protection of up to $150 million on its website.
Don’t panic. In the four decades since SIPC’s founding, it has “advanced $505 million in order to make possible the recovery of $15.7 billion in assets for an estimated 626,000 investors.”
As an Internet junkie, I will take these tips to the bank! The entire article can be read by clicking here.
