The Truth About Investing at Vanguard, Fidelity, Charles Schwab

Since there've been a few banks collapsing recently I've received a ton of questions about what happens to your investments if your brokerage goes bankrupt or shuts down due to financial issues. In this video, I'll go through a few of the ways your money is safeguarded from losing everything as well as what happens if the brokerage you use goes out of business. We'll be specifically covering U.S. brokerages like Vanguard, Fidelity, Charles Schwab, and newer investing platforms like M1 Finance.

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When a brokerage goes out of business, it can be concerning for investors. However, several regulatory safeguards are in place to protect your investments in such situations. Here is a detailed explanation of what happens to your investments when a brokerage goes bankrupt:

SIPC Coverage: In the United States, the Securities Investor Protection Corporation (SIPC) is a non-profit organization that helps investors recover their assets when a brokerage firm goes out of business. SIPC covers up to $500,000 per customer, including a $250,000 limit for cash. Note that SIPC coverage doesn't protect you against market losses or bad investment decisions; it only covers you if your brokerage fails.

Segregation of Customer Assets: Brokerage firms are required by law to segregate customer assets from their own. This means that your investments are held separately from the brokerage's assets. If the firm goes out of business, your investments should not be affected, as they are not considered part of the bankrupt firm's assets.

Liquidation Process: If a brokerage goes out of business, it will typically enter into a liquidation process under the supervision of the SIPC and a court-appointed trustee. The trustee will work to transfer customer accounts to another solvent brokerage firm, which will then take over the management of your investments. You may need to provide some documentation to verify your account holdings during this process.

Frozen Assets: During the liquidation process, your assets may be temporarily frozen, meaning you may not be able to buy or sell securities or access your cash. This freeze is usually temporary and is in place to ensure a smooth transition of accounts to the new brokerage firm.

Possible Delays and Losses: While the SIPC and the court-appointed trustee work to recover your assets, there may be delays in regaining access to your investments. Additionally, if your account holds more than the SIPC coverage limits, you may be considered an unsecured creditor and could potentially lose some or all of the funds exceeding the coverage limit.

FINRA BrokerCheck: Before you choose a new brokerage firm to work with, it's a good idea to check its background and regulatory history through FINRA's BrokerCheck website. This can help you avoid potential issues and ensure that you are working with a reputable firm.

In summary, if your brokerage goes out of business, your investments are generally protected by regulatory safeguards such as SIPC coverage and the segregation of customer assets. However, you may face temporary delays and limitations in accessing your investments during the liquidation process, and accounts exceeding SIPC coverage limits could potentially face losses.

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Disclaimer: This video is for entertainment purposes only. Everyone's situation is different so do your own research before making any decisions with your money. If you need help then contact a Certified Financial Fiduciary before trying anything that is mentioned in this video. I prefer a Fiduciary financial advisor that charges an hourly fee as opposed to an ongoing fee based on a % of your portfolio.