Can brokerage firms like Fidelity, TD Ameritrade, or Vanguard fail? They seem pretty unshakable, but the recent financial crisis made it clear that even very large financial companies can fall. And over the timescale of my lifetime, it seems very possible that one could go out of business.

  • What would happen in that case to investments I made through that company?
  • Would I lose my money?
  • What about IRAs?
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    Google MF Global, you should get your answer. – DumbCoder Mar 27 '12 at 8:40

Brokerages are supposed to keep your money separate from theirs. So, even if they fail as a company, your money and investments are still there, and can be transferred to another brokerage. It doesn't matter if it's an IRA or taxable account.

Of course, as is the case with MF Global, if illegally take their client's money (i.e., steal), it may be a different story. In such cases, SIPC covers up to $500K, of which $250K can be cash, as JoeTaxpayer said.

You may be interested in the following news item from the SEC. It's about some proposed changes, but to frame the proposal they lay out the way it is now:

The most relevant quote:

The Customer Protection Rule (Rule 15c3-3).
This SEC rule requires a broker-dealer to segregate customer securities and cash from the firm’s proprietary business activities. If the broker-dealer fails, these customer assets should be readily available to be returned to customers.

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  • Great answer, but note that the rules listed here only cover the U.S. – ChrisInEdmonton Mar 27 '12 at 14:56
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    +1 for not putting your personal agenda in the answer. – littleadv Mar 27 '12 at 17:41

Yes, any company can go under. SIPC offers a level of protection. They don't guarantee against stocks dropping, but will replace stocks that you owned, but the broker stole from you. (overgeneralization). There's a $500K limit, with $250K max in cash.

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Yes, the entire financial system is based on trust. As we have seen repeatedly, even the ratings agencies can be wrong and in collusion.

You need to understand what products have any insurance/contingency/recourse if things don't go as planned. A lot of people were surprised when they found out SIPC didn't ensure futures when MF Global declared bankruptcy last fall.

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    What trust has to do with anything? Has anyone trusted lied to these surprised people? – littleadv Mar 27 '12 at 4:03
  • those were two separate paragraphs and thoughts littleadv. trust has to do with trusting what the ratings agencies say despite their checkered past, trusting that the SIPC will make good on their protection, trusting that a brokerage firm complies with self regulatory bodies. despite "checks and balances" there is a degree of trust involved, trusting that you or your financial advisor understands what products you are getting into. – CQM Mar 27 '12 at 5:46
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    @littleadv you might find this quote from the article I linked to in my answer interesting: -- “When investors hand their assets over to a broker-dealer, they trust that their broker-dealer will hold and invest the assets as directed,” said SEC Chairman Mary L. Schapiro. -- – Patches Mar 27 '12 at 6:11
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    @Patches - they trust that the broker won't break the law. When I meet people on a street I trust them not to kill me, but it doesn't mean that I have a relationship based on trust with them, it means that I have a relationship based on law with them. I believe saying "financial system is based on trust" is plain wrong, even if you find me a quote of someone saying it. Financial system is based on law. If someone does something that is legal, you cannot "trust" them to do it in your best interest, it will be in their best interest. If you think otherwise - you're a fool. – littleadv Mar 27 '12 at 17:40
  • littleadv, the law does not cover things that are not expressly prohibited, and with new products being made every day there is a great degree of trust involved in how all counterparties will react to the performance of a product or service. Also JP Morgan said it himself. – CQM Mar 27 '12 at 19:48

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