John Jagerson

Is Your Money Safe From Broker Risk?

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Being a trader or investor in any market comes with risk. Most of the risk you sustain on a daily basis is market related. Maybe the market will move in your favor and maybe it won't. That seems relatively straight forward but have you considered some of the systemic risks not associated with market movement?

If your broker or dealer fails, it could destroy all, most or some of the profits and deposits you have made over many years. If this only happened once in your lifetime it would be enough to change your financial status forever.

Investors in CDs or bank deposits have some coverage (usually up to $100,000 per account holder per FDIC covered bank) but do trading account holders have similar coverage benefits? Yes and no. Finding out whether or not you are covered is important and definitely relevant in today's unstable economic environment.

Stocks and Options Accounts:
Traditional brokerage accounts are usually covered in two ways. First, your broker may offer a sweep account that will qualify for coverage by the FDIC (like Suze Orman's examples) and your positions and remaining balances are usually covered by the SIPC (another Federal insurance agency) up to $500K.

If your broker were to fail, your account positions and balances would be transferred to another clearing firm. The process takes some time but ultimately you can anticipate getting your money back. The SIPC has done this 317 times and a little over 99% of investors involved have been paid what they were owed.

Exchange Trade Futures Accounts:
If you own a futures account, things get a little more complicated but not by much. Your futures account is actually separated and designated to your sole benefit. This means it cannot be attacked in a bankruptcy or receivership process. Ultimately, the account and your open positions are transferred to another clearing firm where you can access it. Recently this happened to the futures account holders at Refco. There is no upper limit on how much you can have in your account for this kind of coverage.

Forex Dealers:
If you have an over-the-counter forex account of any kind you are typically out of luck if your dealer fails. Forex dealers do not segregate accounts (especially outside the U.S.) in the same way a futures broker does and it can be attacked in a bankruptcy. This is what happened recently to traders with forex accounts at Refco. This makes it even more important to be very picky about who you trade with and to have more than one account.

Why Does This Matter?

If you have a single uncovered account or partially uncovered account and your broker or dealer fails it doesn't matter how profitable you have been - its gone. Over the last year we have learned that no bank or financial institution can be considered immune to sudden and catastrophic failure. There have been 57 bank failures in the U.S. over the last 12 months; Marque names like Lehman, Bear and Citigroup have lost all or most of their value and Standard and Poors has lost their rating credibility. This is a new market and nothing should be taken for granted.

Your homework is to call and annoy your brokers and/or dealer and find out exactly how you are covered and what you need to do to improve that coverage. Don't get burned by ignorance. Take action now to make sure your exposure is reduced.

This market is packed with opportunities to make big money ... if you know where to look. Find the hidden money-doublers in today's stock market. Learn more in your FREE Options Report.