Account Security.

Discussion in 'Retail Brokers' started by Bing69, Nov 22, 2005.

  1. Bing69


    Would someone be kind enough to advise the most suitable type of broker for a newbie investor?

    I’m interested in building a stock investment portfolio with minimal turnover and longer-term holdings. As I understand it brokers such as Interactive Brokers are more suited to traders who are buying and selling stocks several times a month or more. Should I go to a traditional broker or would IB still be suitable?

    Also, in light of what recently happened at Refco, how secure is my account and stock holdings if the broker fails/ commits fraud?

    For example, what portion of my portfolio/ account is at risk? Is it just the cash balance at the brokerage or is the investment in the actual stocks that I have bought at risk also?
    I’m under the impression that when I buy a stock I am issued with a certificate giving me ownership in that company and this cannot be taken away?
    If this is the case, am I better to keep my cash funds in my bank account and just transfer into my brokerage as and when I buy a stock?

    Thank you
  2. do some due diligence on foliofn

    they might be worth looking at for your needs

    some other online brokers also might offer

    basket trading longer term of stocks

    or you can also look at mutual fund companies

    like rydex perhaps ...
  3. alanm


    Retail brokerages in the US are required to be SIPC-registered ( ). Your holdings are protected up to $500K, $100K of which can be cash. Look for a firm with low/no minimums/fees and a website that works well for you (i.e. research, ease of use, etc.).
  4. If you were an active trader, like those who frequent this bboard, concerned about account security, then Interactive Brokers would probably be your best option. You, however, are not an active trader. You seldom trade, but you are still rightfully focused on account security. If you are willing to pay higher transaction costs, because you seldom trade, then you can find a securities broker safer than IB, and you can achieve nearly total protection of your entire account, even if greater than $100,000 cash or $500,000 in securities. IB is a very safe broker, but IB holds securities in street name and does not offer fiduciary accounts; and I will explain why these things matter.

    You should find a broker who will keep all your cash in what is called a "fiduciary account". This means an FDIC-insured bank account, with your name appearing in the bank's records, as the sole owner of the entire account, which the broker holds in trust for you. Most brokers don't do this; they instead have a single omnibus account which pools all customer funds. If your broker uses a fiduciary account for you, and then your broker goes bankrupt, SIPC will return ALL of your funds to you, no matter how large the amount, even if this amount is far in excess of SIPC's $100,000 limit. This $100,000 limit only applies when you have not received all of your cash, because it was not all in a fiduciary account, and because your pro-rata share of the broker's omnibus customer cash and securities also failed to make you whole.

    The only risk you still face, with a fiduciary account at a bankrupt broker, is the risk that your broker might embezzle your funds or erroneously fail to place then into the fiduciary account, and then go bankrupt; in this case, then, just like all the other customers unprotected by fiduciary accounts, you will have to rely on the SIPC's pro-rata distribution of omnibus customer property, and SIPC will cover any deficit remaining only as to the first $100,000 of cash you had on deposit.

    Another requirement you must impose is that your broker not place your securities in "street name". If your securities are placed in "street name", then the broker is the legal owner, and it is the broker's name which appears in the ownership records of the company issuing the stock. Your broker also keeps its own internal records, stating how many of its "street name" shares, in that particular stock, are indirectly owned, through the broker, by each of its customers. If your broker goes bankrupt, then your reimbursement for securities held in "street name" would be occur through SIPC's pro-rata distribution, to all customers, of all omnibus customer cash and securities, and then, SIPC will cover any deficit remaining as to only the first $500,000 worth of securities you had on deposit.

    You don't want securities to be held in "street name", because your chief concern is security, rather than minimizing trading costs. You would therefore want a broker which places your own name in the official ownership records of the stock's issuer, instead of using the broker's name. If your name is used, then SIPC will return ALL of your securities to you, no matter how much they are worth, and without regard to the $500,000 limit, which does not apply, since your securities are not in "street name". You will need to make sure that the account agreement you sign does not allow the broker to hold securities in street name, or to loan, invest, pledge, hypothecate, etc., etc., your securities.

    The only risk you will still face, in avoiding "street name" ownership of your securities, is that if your broker embezzles them or erroneously loans them or if they go missing for some strange reason, then SIPC cannot return them to you. You would then have to rely on the SIPC's pro-rata distribution of omnibus customer property, and if this leaves you in deficit, then SIPC would make you whole, but only up to their $500,000 limit for securities.

    Another added protection, of using fiduciary accounts and avoiding "street name" securities ownership, is that you will be safe even if SIPC goes bankrupt. SIPC is an insurance fund created by the U.S. Congress, but it can go bankrupt if its premium collected, from insured entities, doesn't cover SIPC payouts owed in the event of one or more larger broker bankruptcies. If SIPC bankrupted, then only an act of the U.S. Congress would be capable of refunding SIPC so that it could make good on its coverage. If your cash is held in fiduciary accounts, and your securities are in your own name, then you will be fully protected, no matter how much money is involved, without regard to the numerical limits of $100,000 and $500,000, even if both your broker AND SIPC go bankrupt. If, however, your money is not in the fiduciary account, or your securities are not in your name, because of broker fraud or error, then you can lose everything in an SIPC bankruptcy.

    If you use a fiduciary account with your broker, and you keep as little cash as possible in it, then you will minimize the risk that your broker will erroneously or fraudulently fail to obey your instructions to keep it in the fiduciary account.
  5. roc


    did you know if 100k insurance by the SIPC applyes by account or by title.

    I mean suppose i have 2 account under the same exactly name, are taken as separate or combined?
  6. range


    I think it is by title. E.g., an account in your name and a separate IRA account would each be allowed separate SIPC coverage. Two accounts in your name would be combined for purposes of determining your coverage.
  7. Combined, if both accounts are held at the same broker.

    Separate, if the two accounts are at two separate brokers.

    This applies to both the 100K limit for cash, and also the 500k limit for securities.

  8. Accounts are combined only if they are held by the same person, acting in the same capacity, at the same broker.

    An account in your name, and another account held by another party in trust for you, also at the same broker, will be combined.