When the brokerage goes bust !?

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Domadosolo
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When the brokerage goes bust !?

Post by Domadosolo »

What happens if there is a massive management issue at your Brokerage-Preferred?
What are the risks I need to consider?
Do you divide your Taxable OR Tax deferred accounts across multiple Brokerages? (eg 50% at Vanguard & 50% at Fidelity)?
What are the considerations to make this decision?
How many brokerages do you use?
And Finally
If you use multiple brokerages, how do you consolidate your portfolio info?

Thanks in advance for your advice :)
UpperNwGuy
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Re: When the brokerage goes bust !?

Post by UpperNwGuy »

I doubt any of these brokerages will go bust, but I divide my investments among Vanguard, Schwab, and Fidelity for a variety of reasons. A simple spreadsheet consolidates the information for me.
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JoMoney
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Re: When the brokerage goes bust !?

Post by JoMoney »

The assets a brokerage holds for clients are kept separate, are not assets of the brokerage, and are not available to the brokerage's creditors in the event it "busts" in some sort of bankruptcy.

If the brokerage has been mis-accounting cash or securities they hold for clients by some sort of accident or fraud, they would have to make the clients whole and restore the missing assets. If the brokerage can't, that's where SIPC (and potentially additional insurance) steps in and covers the value of the missing cash or securities (provided they are SIPC covered assets/securities.)

Some brokerages have made additional statements with regard to electronic fraud against an individuals account, that if the individual has followed basic security precautions, and reports it quickly, they will make the investor whole. This is not something required by law, and not all brokerages have made such promises, so it is something to look for (and possibly something that their should be legal remedies over.)

I don't keep multiple accounts/brokerages. It's easier to stay on top of reviewing my statements and look for any fraud or discrepancies if they're not scattered over multiple places.
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lazynovice
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Re: When the brokerage goes bust !?

Post by lazynovice »

I used to split between three brokerages. I no longer do. When I did, I used a spreadsheet to keep track. I still use a spreadsheet because I have different types of accounts.

Lehman Brothers brokerage went bankrupt. Here is an article on its impact:

https://libertystreeteconomics.newyorkf ... ankruptcy/

“Lehman’s bankruptcy caused minimal disruptions to most customers of its broker dealer, Lehman Brothers Inc. (LBI). One reason is that, by law, customer assets and Lehman’s own assets were segregated. Also, perhaps because the bankruptcy was to some extent foreseen, a large number of customer accounts transferred out before LBI’s default.”

“After LBI was put into a Securities Investor Protection Act (SIPA) liquidation proceeding, most of the remaining customer accounts were transferred quickly to solvent broker-dealers.”
CurlyDave
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Re: When the brokerage goes bust !?

Post by CurlyDave »

I had assets in a brokerage house that went under in the early 1980s. It was not my entire portfolio, and they were transferred to another brokerage with minimal disruption and very little effort on my part.

It was so easy I have forgotten the details.
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Domadosolo
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Re: When the brokerage goes bust !?

Post by Domadosolo »

CurlyDave wrote: Sat Nov 27, 2021 11:05 pm I had assets in a brokerage house that went under in the early 1980s. It was not my entire portfolio, and they were transferred to another brokerage with minimal disruption and very little effort on my part.

It was so easy I have forgotten the details.
Hi CurlyDave,
How long was it before you had access to your assets? ie. could rebalance or sell?
livesoft
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Re: When the brokerage goes bust !?

Post by livesoft »

I use multiple brokerages. I sort of consolidate my asset allocation of the total-across-the-board portfolio as described in this thread:
viewtopic.php?t=150267

Since things do not change very much and only very slowly I don't actually have to look at this kind of thing very often. For instance, my account at Fidelity has never had a buy nor a sell transaction in it. It sits there and sends dividends to my checking account. The main portfolio management technique that I employ is "Do nothing."

None of my accounts are held at toy come-and-go brokerages. They are held at major brokerages.
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crefwatch
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Re: When the brokerage goes bust !?

Post by crefwatch »

I only use multiple brokerages for employment or historical reasons, not for fear of TEOTWAWKI.

If you hold individual stocks in your account(s), you have more risk of total loss there, than you have risk of momentary inconvenience. If you have mutual funds or ETFs, you should be asking the question about those vehicles. But the answer is the same. Have you read in the prospectus (!) that they can temporarily restrict your ... gasp ... liqidity?

It's a brokerage, or your mattress.
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nisiprius
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Re: When the brokerage goes bust !?

Post by nisiprius »

That's what the SIPC, Securities Investor Protection Corporation, is for.

SIPC History and Track Record
The Securities Investor Protection Corporation (SIPC) had its origins in the difficult years of 1968-70, when the paperwork crunch, brought on by unexpectedly high trading volume, was followed by a very severe decline in stock prices. Hundreds of broker-dealers were merged, acquired or simply went out of business. Some were unable to meet their obligations to customers and went bankrupt. Public confidence in the U.S. securities markets was in jeopardy.

Congress acted swiftly, passing the Securities Investor Protection Act of 1970, 15 U.S.C. § 78aaa et seq. (SIPA). SIPA's purpose is to protect customers against certain types of loss resulting from broker-dealer failure and, thereby, to promote investor confidence in the nation’s securities markets.
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alex_686
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Re: When the brokerage goes bust !?

Post by alex_686 »

Similar to when a bank goes under. The accounts are sold to a new brokerage firm. The process is not as smooth as with a bank where it happens overnight. Less than a week.

If you want I could go into details about “Segregation” of assets and their executions. It is a safe and robust process.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Makefile
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Re: When the brokerage goes bust !?

Post by Makefile »

alex_686 wrote: Sun Nov 28, 2021 12:48 pm Similar to when a bank goes under. The accounts are sold to a new brokerage firm. The process is not as smooth as with a bank where it happens overnight. Less than a week.

If you want I could go into details about “Segregation” of assets and their executions. It is a safe and robust process.
I think a lot of anxiety about brokerage failure comes from a string of failures in the 1960s. Since shares were still done on paper certificates at the time, it was possible for a brokerage to have fewer shares in their vault than adding up all their customers' account statements. Is that right?

Also, the segregation is weaker in a margin account, correct ("rehypothecation")?
student
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Re: When the brokerage goes bust !?

Post by student »

Yes. I do divide the assets so that I have accounts in several places. I don't wants hiccups in accessing the money if there is a prolonged period of technical issues.
CurlyDave
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Re: When the brokerage goes bust !?

Post by CurlyDave »

Domadosolo wrote: Sun Nov 28, 2021 9:37 am
CurlyDave wrote: Sat Nov 27, 2021 11:05 pm I had assets in a brokerage house that went under in the early 1980s. It was not my entire portfolio, and they were transferred to another brokerage with minimal disruption and very little effort on my part.

It was so easy I have forgotten the details.
Hi CurlyDave,
How long was it before you had access to your assets? ie. could rebalance or sell?
I think it was a few weeks. Longer and I would remember. But the details are lost in time. Almost 40 years ago. I would definitely remember if it had been several months.

I was not a frequent trader then and am not one now, so no big deal.
Answering a question is easy -- asking the right question is the hard part.
alex_686
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Re: When the brokerage goes bust !?

Post by alex_686 »

Makefile wrote: Sun Nov 28, 2021 12:58 pm
alex_686 wrote: Sun Nov 28, 2021 12:48 pm Similar to when a bank goes under. The accounts are sold to a new brokerage firm. The process is not as smooth as with a bank where it happens overnight. Less than a week.

If you want I could go into details about “Segregation” of assets and their executions. It is a safe and robust process.
I think a lot of anxiety about brokerage failure comes from a string of failures in the 1960s. Since shares were still done on paper certificates at the time, it was possible for a brokerage to have fewer shares in their vault than adding up all their customers' account statements. Is that right?
You have the general idea but the specifics are off.

You have to go back to the 1940's bucket shops to find brokerages that did not have enough shares to cover their client's holdings. In theory - we can find examples of fraud where this is not true.

There should be enough shares to cover everybody at the brokerage. Expect that all securities where held in one giant co-mingled account - the opposite of the segregated account. Then a big client or the investment bank / speculative trading unit would make a big trade that went wrong wiping them out. i.e., their account balance would go negative - not just zero. i.e, they deposited 1m in cash and lost 2m or more. This loss would cascaded, wiping out the client first, then the firm's equity, and then their client's equity.

Now clients assets are held in a segregated account. The firm could blow up and the client's assets would be untouched.
Makefile wrote: Sun Nov 28, 2021 12:58 pm Also, the segregation is weaker in a margin account, correct ("rehypothecation")?
Not exactly. It is not the margin account. Rather, for every $1 you borrow from the brokerage the frim can lend out (hypothecation) $1.40 worth of securities. The lent out bit is in a co-mingled account. However this account is over collateralized so even if the lender counterparty and your brokerage both go bust you should be made whole.

Rehypothecation is when the borrowed hypothecated shares are then lent out for a short sale.

Which is what happened with the accounts that I worked with when Lehman Brothers went bust. We received the cash equivalent instead of the actual securities - which triggered capital gains. It took a week to get everything resolved. But we were made whole.
Last edited by alex_686 on Sun Nov 28, 2021 6:53 pm, edited 1 time in total.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
000
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Re: When the brokerage goes bust !?

Post by 000 »

Nobody really knows what will happen during the next financial crisis, if safeguards in place will work or if they are even being followed.

It's all numbers on a screen and we have no way of independently confirming things are as we are told.

As always it would seem diversification is in order instead of relying on claims of safety.
100factorial
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Re: When the brokerage goes bust !?

Post by 100factorial »

000 wrote: Sun Nov 28, 2021 4:58 pm Nobody really knows what will happen during the next financial crisis, if safeguards in place will work or if they are even being followed.

It's all numbers on a screen and we have no way of independently confirming things are as we are told.

As always it would seem diversification is in order instead of relying on claims of safety.
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Domadosolo
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Re: When the brokerage goes bust !?

Post by Domadosolo »

CurlyDave wrote: Sun Nov 28, 2021 4:35 pm
Domadosolo wrote: Sun Nov 28, 2021 9:37 am
CurlyDave wrote: Sat Nov 27, 2021 11:05 pm I had assets in a brokerage house that went under in the early 1980s. It was not my entire portfolio, and they were transferred to another brokerage with minimal disruption and very little effort on my part.

It was so easy I have forgotten the details.
Hi CurlyDave,
How long was it before you had access to your assets? ie. could rebalance or sell?
I think it was a few weeks. Longer and I would remember. But the details are lost in time. Almost 40 years ago. I would definitely remember if it had been several months.

I was not a frequent trader then and am not one now, so no big deal.
Thanks
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