investing

Surviving the Broker Blues

If your securities firm goes under, odds are good that your money is safe.

Federal officials say they engineered the rescue of Bear Stearns because its failure could have undermined the nation's financial system. But if you're a client of Bear or another tottering brokerage, you likely have a more mundane matter on your mind: Is your money safe?

The answer is, almost certainly yes.

To protect investors, federal law requires that brokers segregate customer assets from their own. When bankruptcy appears inevitable, the Securities Investor Protection Corp. steps in. In most cases, it transfers customer accounts to a healthy brokerage before a sick one declares bankruptcy so that investors retain control over their assets.

If the brokerage is already insolvent, SIPC puts bankruptcy proceedings on hold while it replaces securities or other assets missing from clients' accounts. It covers losses of up to $500,000 per account, including up to $100,000 in cash. Many brokers also carry supplemental insurance.

Don't expect SIPC to protect you against fraud, inappropriate investment decisions or declines in the value of your stocks, bonds and mutual funds, says SIPC president Stephen Harbeck. "We don't bail out investors from trading losses."

Fund concerns. What if you own a broker-sponsored mutual fund or exchange-traded fund? No sweat. Funds are set up as independent legal entities, and money in them is kept separate from brokers' assets. If, say, UBS or Morgan Stanley were to collapse, fund directors would just hire new advisers.

Broker-sponsored exchange-traded notes are another issue. ETNs, such as the Bear Stearns-sponsored BearLinx Alerian MLP Select Index ETN (symbol BSR), don't actually invest in assets. Rather, they are unsecured debts, with the issuer pledging to repay shareholders based on how the index fares. If an ETN's issuer goes belly-up, holders will have to stand in line with other creditors and may or may not get back their full investment.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
9 Great Growth ETFs for 2022 and Beyond
ETFs

9 Great Growth ETFs for 2022 and Beyond

These growth ETFs offer exposure to higher-risk, higher-reward stocks while lessening the risk of a single stock torpedoing your returns.
January 18, 2022
The 10 Best Closed-End Funds (CEFs) for 2022
CEFs

The 10 Best Closed-End Funds (CEFs) for 2022

These high-yielding CEFs won't just significantly boost your portfolio income. They'll also allow you to buy their underlying stocks and bonds at a di…
January 12, 2022

Recommended

Could the Stock Market Crash for Real? Here’s How to Prepare
investing

Could the Stock Market Crash for Real? Here’s How to Prepare

After a long march to record heights, the stock market tripped into correction territory in January. How should you react? Thoughtfully.
January 25, 2022
The 60/40 Portfolio Is Dead. Long Live 33/33/33.
investing

The 60/40 Portfolio Is Dead. Long Live 33/33/33.

A portfolio of stocks and bonds used to be the gold standard, but it just doesn’t cut it anymore. It’s time to throw some alternative investments into…
January 25, 2022
8 Facts You Need to Know About Stock Market Corrections
Markets

8 Facts You Need to Know About Stock Market Corrections

Scary as they are, drawdowns are a normal part of the investing process. Having a financial plan in place and sticking to it is every investor's best …
January 23, 2022
Is the Stock Market Closed on MLK Day?
Markets

Is the Stock Market Closed on MLK Day?

Both the stock markets and bond markets will have Monday off as the nation honors civil rights leader Martin Luther King Jr.
January 15, 2022