If Banks Fail, Can Your Brokerage Accounts Too?

You don't need to worry about losing your investments.

In the wake of Silicon Valley Bank's (SVB) collapse, people have been understandably concerned about their money. The good news is that the FDIC guaranteed deposits for all SVB clients, so they didn't lose anything. Still, it raises the question of where your money is safe.

Nearly all U.S. bank accounts have FDIC insurance covering up to $250,000 per depositor, per ownership category. But what about your brokerage account? After all, you may have far more money invested there than you do in cash. It's natural to wonder what would happen if your stock broker collapsed. Fortunately, this is highly unlikely, and even if it did happen, you'd be covered.

Are brokerage accounts safe?

Yes, brokerage accounts are safe places for your money. To explain why, we need to get into the difference between putting your money in the bank and investing it through a brokerage account.

When you deposit money in the bank, the bank doesn't just put that money in a vault. Banks invest money by issuing loans and buying bonds. They only hold a small percentage of client deposits as cash. So, if a bank doesn't manage its investments and loans well, it risks collapsing and not being able to give clients their money back (this is a rare occurrence).

A stock broker, on the other hand, buys and stores investments on your behalf. Let's say you invest $10,000 to buy 100 shares in an exchange-traded fund (ETF). Your broker simply makes the purchase and stores your 100 shares for you. Even if your broker collapsed, you'd still be the owner of those 100 shares in that ETF.

The securities you hold in your brokerage account are yours, and they're completely separate from the broker's other assets. They are, effectively, in their own vault. Stock brokers can't use customer assets to finance their own businesses. They'd be in violation of the SEC's Customer Safeguard Rule, and stock brokers need to comply with SEC regulations.

What happens if your stock broker collapses?

Now, let's take a look at the worst-case scenario: Your stock broker fails. It's probably not going to happen, but it's within the realm of possibility.

Where do all your investments go? This is a common question, and the Financial Industry Regulatory Authority (FINRA) has the answer: "In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm."

So, your securities will go from the stock broker that failed to one that's alive and well. For example, that's what happened in 2008 when Lehman Brothers went bankrupt. None of the investors who used Lehman Brothers lost money, and investments were transferred.

One last potential issue is if your stock broker collapses and there are securities missing. The most likely reason this would happen is due to fraud on the broker's part. In this case, the Securities Investor Protection Corporation (SIPC) would step in.

SIPC insurance is used to cover investors if a brokerage fails and there's a shortage after all customer assets have been recovered. Coverage limits are up to $500,000 per customer, up to half of which can be used to cover cash. The broker must be an SIPC member, but almost all of those registered with the SEC are.

It's worth reiterating how rare this all is. Stock brokers don't fail often, and when one does, there are hardly ever securities missing. The SIPC was created in 1970, and in all the brokerage failures it has handled since then, 99% of eligible investors got their investments back.

Protecting yourself as an investor

Thanks to U.S. financial regulations, it's easy to stay safe as an investor. What's most important is choosing a broker that's an SIPC member. As mentioned earlier, the vast majority are. You can find out if a broker is an SIPC member on its website or by contacting it. With any of the best stock brokers and the big names in the industry, your money is going to be safe.