NanoTick wrote on:
02-13-09 05:40 AM
I would like to get some advice on ths issue of account safety with brokerage firms. Specifically,
1. Are brokerage accounts at risk due to current financial crisis experienced by banks?
2. Where do brokerages keep our money? It it in another bank?
3. Is there risk from the clearing house?
4. Would you keep over a $100K at one brokerage?
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1. All accounts, business and individuals, are at the same risk if there is a bank failure. The accounts are insured up to the FDIC limit. In reality, the FDIC will take over the bank and seek another bank to assume the deposits and hopeful the liabilities.
2. Without going into details, brokers must keep some customer's funds segregated and can commingle some customer's
funds with the firm's funds according to your account status with the broker. Customer's funds segregated cannot be used by the broker but commingled funds can be used by the broker. Segregated funds normally are placed in some type of interest bearing short-term account such as money markets. Commingled funds can be used by the broker to carry inventory or as margin loans to customers, etc.
3. There is normally risk with everything. Commodity exchanges have clearing houses and security broker-dealers have depositories. These are probably the safest and soundest of all financial institutions.
4. I would treat brokerage accounts like bank accounts as far as cash deposits and have multiple accounts. But I am the conservative type. All brokers that carry customers accounts must be a member of SIPC which insurers up to $100,000 of cash in an account. Most brokers, unlike banks, purchases additional coverage from an insurance company. But the extra coverage, like all insurance policies, are only as good as the insurance company. All states require the insurance companies to maintain sufficient reserves to provide adequate protection under normal circumstances. But, as everyone knows, the SIPC, FDIC and the insurance companies only have a fractional amount of reserves to cover their obligations in the case of dire adversity.
