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I am fairly young (late twenties), but would like in invest in an index fund or ETF. I will be investing around 700 Euros per month and plan to do so for the next 40 years or so.

What happens if I use an online broker and that broker goes bust? How do I get the money from the shares / funds out?

Thanks

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    Why the downvotes? Totally valid question. In the US, make sure the broker is SIPC-insured. Is there a Europe equivalent? – Rocky Apr 20 '18 at 20:44
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    What country is this in regards to? – quid Apr 20 '18 at 21:10
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    @quid from France, but will be investing in UK and other European funds – Cloud Apr 23 '18 at 6:33
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There's no 100% guarantees in life, but if you work with a company that has already been around for a number of years you can feel comfortable that they know the laws and follow them.

The risk really isn't with them going bust. The customer is always an asset and another bank would be happy to take ownership of those assets. If that happens your assets just get transferred to the new broker and you can decide if you want to keep them there or transfer them to someone else. This happens all the time even without a bankruptcy. Business regularly merge or get bought.

What you need to worry about is that the broker is using your money for what they say they are using it for. In other words if you buy shares do they actually buy the shares or use it for something else. Using a well established broker with a number of years in business should minimize the chance of this happening to near zero.

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In Europe (given you say you're investing Euros), you should check the brokers' information on "investor protection". You should expect to see at least some mention of "segregated accounts" where client's (pooled) holdings are kept separate from other assets. Ideally these would be held in in a separate nominee company so if the broker goes bust their creditors have no call on the ringfenced assets.

Additionally, there will be some state protection (compensation) for investors against the risk of a failing investment platform (not against failing investments!), but that's limited to on the order of tens-of-thousands of euros.

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    @Cloud The French deposit/investment scheme page is the FGDR. For investments (where the firm cannot return the shares/etc.) the current limit is €70,000. – TripeHound Apr 23 '18 at 15:18
  • @TripeHound Thanks for this. That is a very low amount.. I guess you could spread over several brokers but then that minimizes the benefits of compound interest and the like – Cloud Apr 24 '18 at 10:50
  • @Cloud 100000 split over two brokers compounds just as fast (in total) as 100000 with one broker! The main issues with using multiple brokers is more hassle factor and additional fees if the charging model is flat fee or capped percentage fee (less so if simply proportional to holdings though). – timday Apr 25 '18 at 15:39
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After a quick google search, I found some information on the FINRA website (Financial Industry Regulatory Authority).

Short answer - there are measures in place to handle if a brokerage goes under. Usually the accounts are transferred to another firm, and you will have access to your money within 1-3 months.

Long answer - Here are some things to keep in mind:

  • You probably won't have access to your funds for a while during the change process.
  • But, you probably won't lose your money either. The firms are required to keep their own and their client's money separate, and keep some amount of capital on hand.
  • In addition to that, firms are usually members with the SIPC which "covers missing stocks and other securities up to $500,000" - similar to the FDIC and bank accounts.
  • If a firm that you have accounts with does go under, make sure that you keep all paperwork and records that you have. And be ready to fill out some forms.

The webpage has more information and includes additional resources at the bottom of the page.

NOTE: This is USA specific, and is probably different for other countries.

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I was in a similar situation a few years ago. I had no one to guide me and I didn't trust any of the smaller brokerages. So, I created my account with one of the largest banks in the country. The chances of the bank going under, even in next 40 years is very low.

I knew that a full service broker would charge higher commissions. But since I was into longer term investing and not frequent short-term trading, those commissions didn't make much difference.

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  • I have considered this, but have been warned about the high fees of high street banks. However, how have you found the experience so far? – Cloud Apr 23 '18 at 6:36

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