02-05-2018, 12:40 AM
Warning: long post below.
I have been thinking about that question for a while. Should we keep all of our investments with the same brokerage firm, especially when they get closer to the SIPC limit? Here are some of my observations after reading on the subject:
1) When you buy stocks through a brokerage firm, the stocks are in "street name", meaning it's the name and address of the brokerage firm that appear in the company's books, not yours.
2) What actually happens if your brokerage firm goes bankrupt? Information found on the web is not completely clear on the subject, and it is even contradictory sometimes. My understanding is the following (I may be wrong though): If you can give proof of ownership by providing your transaction records, you should be fine.
3) Most major brokerage firms have SIPC insurance, which is $500,000 for stocks. That SIPC insurance comes into play if you cannot prove ownership of stocks or in case of fraud.
4) It is true that some brokerage firms have additional insurance on top of SIPC. However, that additional insurance represents only a fraction of the customers’ assets. For example, for Fidelity: “Total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion”. However, total customers assets for Fidelity is $6.2 TRILLION!
5) It is unlikely that your brokerage firm will go bankrupt. However, the same could have been said for some of the financial companies that went bankrupt in 2009 and for MF Global in 2011.
6) One factor that may help you choose a brokerage firm could be its credit rating (or the rating of its parent company). I have looked at them for you:
Scottrade: Fitch: BBB- Moody:Baa3
Fidelity: Fitch: A+ S&P:A+
Charles Schwab: S&P: A+
TD Ameritrade: Moody: A2 S&P: A
E-Trade (ETFC): S&P: BBB
Merril Edge (Bank of America company): S&P: A-
Ally Invest (Ally Financials): S&P: BB+
Interactive Brokers LLC: S&P: BBB+
TradeStation (Monex Group inc.): Japan Credit Rating Agency, Ltd: BBB
The Vanguard Group: could not find
Based on these credit ratings, one may give preference to Fidelity, TD Ameritrade, Schwab, Interactive Brokers and even Merril Edge (if you can trust Bank of America).
7) One should take these credit ratings with a grain of salt. We can look at MF Global story. It was a derivatives brokers (not a discount brokerage firm). Its credit rating was still investment grade (BBB-) until a few days before it went bankrupt in 2011.
My personal conclusions:
- It is unlikely that the major brokerage firms will go bankrupt any time soon. However, it is not impossible.
- I need to find someone knowledgeable and trustworthy to confirm #2 above. If keeping good records is enough to avoid losing your stocks ownership, then a second brokerage firm should not be necessary.
- I need to keep better personal records of my transactions.
- I am still thinking about using more than one brokerage firm.
- I will consider the firms’ credit ratings as listed above to help me choose.
Additional questions for which I could not find satisfactory answers:
1) Let’s say Fidelity goes bankrupt, and it must rely on SIPC insurance for many of its clients. Would SIPC have enough funds for all of Fidelity’s 26 million customers??
2) Where does SIPC money really come from?
Marc
I have been thinking about that question for a while. Should we keep all of our investments with the same brokerage firm, especially when they get closer to the SIPC limit? Here are some of my observations after reading on the subject:
1) When you buy stocks through a brokerage firm, the stocks are in "street name", meaning it's the name and address of the brokerage firm that appear in the company's books, not yours.
2) What actually happens if your brokerage firm goes bankrupt? Information found on the web is not completely clear on the subject, and it is even contradictory sometimes. My understanding is the following (I may be wrong though): If you can give proof of ownership by providing your transaction records, you should be fine.
3) Most major brokerage firms have SIPC insurance, which is $500,000 for stocks. That SIPC insurance comes into play if you cannot prove ownership of stocks or in case of fraud.
4) It is true that some brokerage firms have additional insurance on top of SIPC. However, that additional insurance represents only a fraction of the customers’ assets. For example, for Fidelity: “Total aggregate excess of SIPC coverage available through Fidelity's excess of SIPC policy is $1 billion”. However, total customers assets for Fidelity is $6.2 TRILLION!
5) It is unlikely that your brokerage firm will go bankrupt. However, the same could have been said for some of the financial companies that went bankrupt in 2009 and for MF Global in 2011.
6) One factor that may help you choose a brokerage firm could be its credit rating (or the rating of its parent company). I have looked at them for you:
Scottrade: Fitch: BBB- Moody:Baa3
Fidelity: Fitch: A+ S&P:A+
Charles Schwab: S&P: A+
TD Ameritrade: Moody: A2 S&P: A
E-Trade (ETFC): S&P: BBB
Merril Edge (Bank of America company): S&P: A-
Ally Invest (Ally Financials): S&P: BB+
Interactive Brokers LLC: S&P: BBB+
TradeStation (Monex Group inc.): Japan Credit Rating Agency, Ltd: BBB
The Vanguard Group: could not find
Based on these credit ratings, one may give preference to Fidelity, TD Ameritrade, Schwab, Interactive Brokers and even Merril Edge (if you can trust Bank of America).
7) One should take these credit ratings with a grain of salt. We can look at MF Global story. It was a derivatives brokers (not a discount brokerage firm). Its credit rating was still investment grade (BBB-) until a few days before it went bankrupt in 2011.
My personal conclusions:
- It is unlikely that the major brokerage firms will go bankrupt any time soon. However, it is not impossible.
- I need to find someone knowledgeable and trustworthy to confirm #2 above. If keeping good records is enough to avoid losing your stocks ownership, then a second brokerage firm should not be necessary.
- I need to keep better personal records of my transactions.
- I am still thinking about using more than one brokerage firm.
- I will consider the firms’ credit ratings as listed above to help me choose.
Additional questions for which I could not find satisfactory answers:
1) Let’s say Fidelity goes bankrupt, and it must rely on SIPC insurance for many of its clients. Would SIPC have enough funds for all of Fidelity’s 26 million customers??
2) Where does SIPC money really come from?
Marc