Logo Background RSS


What If Your Broker Goes Bust?

  • Written by Syndicated Publisher 327 Comments327 Comments Comments
    January 20, 2012

    If investing seems harder than it used to, you’re not imagining things. U.S. stocks are down from a decade ago, the gold/silver miners haven’t kept up with the underlying metals, and though Treasury bonds have done pretty well, only a lunatic would count on them going forward.

    And now that MF Global has crashed and taken its customers’ money with it, we’re faced with the possibility that even if our stocks go up, the accounts they’re in might disappear without a trace. So yeah, it’s harder than it used to be.

    On this last point, there’s clearly a market for advice on how to minimize brokerage account risk, and BullMarketThinking’s Tekoa Da Silva has has just published a report,“Bulletproof Your Shares”, that does a good job of explaining the various alternatives. The report sells for $44.95, but he’s graciously allowed DollarCollapse to post a few excerpts:

    The Greatly Misunderstood MF Collapse 
    What most investors haven’t grasped yet, and what the mainstream media has not reported—is the fact that MF Global was not just a clearinghouse for Futures and Futures Options—it was a clearinghouse for securities as well. This means the “first domino” in the broker dealer industry has already fallen. Now the question remains—was it an isolated case? Or will there be more dominos to fall?

    As reported to me by the Securities Investor Protection Corporation (SIPC), 800 MF Global account holders suffered ownership losses holding shares in their accounts. Those account holders are now being replenished by the SIPC. A second question remains: How much has been paid out, and how much does the SIPC have left in the event of another broker dealer collapse? This they could not share.

    As stock investors–how are we supposed to respond and prepare if these collapses begin spreading to stock broker dealers? How would you respond if you were informed your stock broker went bankrupt—and your assets are in the hands of trustee to be split among a long line of creditors?

    Many claim they’ll be protected by the SIPC, which insures stocks accounts from broker collapse up to $500k for securities, and account cash balances up to $250k. But what if you have more than $250k in cash and/or more than $500k of securities in your account? What if one of the largest broker dealers in the country went bust, bringing down thousands of accounts and depleting the entire reserves of the SIPC?

    Additionally, we have yet to see the largest debtor nation in the history of the world (The United States of America) come under budget funding pressure by the bond markets. What if two major broker dealers went bust, while at the same time, the U.S. government suffers a major Treasury bond auction failure? This would result in billions of dollars of non-recoverable losses by investors, who would likely never invest in the financial markets again. Under that scenario you can forget about relying on the SIPC.

    With these risks in mind—what if I were to tell you that for the cost of administrative fees, you can purchase an additional layer of “common-sense insurance” on any size stock portfolio, even on share investments worth north of $100 million? Well that’s what I’ve discovered in my research. I found there are two additional layers of preventative action you can employ starting right now to protect your shares in the event your broker dealer goes bust. These two methods are so reliable, that even if your broker lost all the cash and securities held in each and every one of its customer accounts, you’d be able to sleep safe and sound, knowing your investments would be fully protected.

    Da Silva goes on to outline those extra layers of protection, their costs, paperwork requirements and set-up procedures, while answering some related questions like what to do if you lose a paper certificate and how to manage this kind of transition in a tax deferred investment account:

    Q: I want to use these methods of share ownership for my stocks, but they’re stuck in a 401k or IRA—What do I do?

    A: Self-directed 401ks and IRA’s are the best option. What the financial community does not tell individual investors is that self-directed retirement accounts can offer the flexibility of investing in nearly everything—from gold and silver coins, to farmland, farm tractors and oil wells. This includes shares investments using DRS and paper certification. Please see our Resources section at the end of this paper, for the names of a few companies which offer self-direction services for retirement accounts.

    The full report is available here.

    Images: Flickr (licence attribution)

    About The Author

    Post image for About

    DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.