Tuesday, May 25, 2010

What happens to the funds in a brokerage account when the Broker Bank collapses?

At retail banks deposits are insured at a maximum of $100.000.How does it work at a Broker Bank?.....say if somebody has $1,000,000.00,what amount is preserved and what is lost?Also how long before one has access to the funds again?
What happens to the funds in a brokerage account when the Broker Bank collapses?
Well, there's 2 types of insurance that most brokers work with:


1. A government-sponsored insurance scheme not unlike the FDIC 100K. BUT just like the 100K policy, if the government is low on funds they will probably not pay you the whole amount, but rather negotiate and settle at a lower amount (which is usually at least 40% of you deposit).


2. The vast majority (99%) of brokers carry additional insurance from a major insurer (usually Lloyd's), which protects your account for a large sum (mine's protected till $5 million).
Reply:There are certain guarantees in place. It depends on the kind of account. For instance, a brokerage account that is designated as a tax deferred retirement account is guaranteed for the first $250,000.00. But that is only if the brokerage goes under, and takes all the money. The brokerage accounts are supposed to be segregated to protect it. You should call your broker and ask these questions. Perhaps it is necessary to split your account between different brokerages to afford you the protection of a federal guarantee, just as you would your bank accounts to get the FDIC protection.
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