Thanks to modern technology, the way we bank today looks entirely different than it did just a few decades ago. You can deposit checks using your mobile phone, send money to friends via text message, and buy and sell stock with a few clicks of a button. Online stockbrokers have also created a plethora of new ways to invest, and they’ve made the industry more mobile and much more accessible in the process.
While all of these changes come with pros and cons, it’s hard to deny the addition of new online investing platforms has increased competition and driven down pricing. In fact, investing has become so cheap that free robo-advisors could be the next investing price war.
But new technology tends to run its course over time, and not all investing platforms are built to last forever. Unfortunately, this has meant that some popular stockbrokers have merged with others or shut down completely.
Remember TradeKing? It’s now part of Ally Invest.
Motif Investing, a platform that offered theme-based portfolios known as “motifs,” has transferred all its accounts to a new platform called Folio Investing.
What about Scottrade? This investing platform no longer exists, but all client accounts were moved to TD Ameritrade.And soon, TD Ameritrade will likely move to Schwab.
The list goes on and on, but you get the point. Technology paves the way for new companies and investing platforms to come to fruition, but not all of them will be around 5, 10, or 20 years from now.
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What Happens When Your Stockbroker Shuts Down?
According to the experts, you shouldn’t necessarily panic if your stockbroker announces it is merging with another company or closing its doors.
Financial advisor Brett Koeppel of Eudaimonia Wealth in New York says that, first off, firms are required by law to keep client assets separate from firm assets at all times. This is due to a U.S. Securities and Exchange Commission (SEC) rule known as the Customer Protection Rule. This rule ensures that a stockbroker who runs into trouble can’t just spend the money in your account to stay afloat.
“The Customer Protection Rule seeks to avoid, in the event of a broker-dealer failure, a delay in returning customer securities or worse, a shortfall in which customers are not made whole, by requiring broker-dealers to safeguard both the cash and securities of their customers,” writes the SEC.
But that’s not the only layer of consumer protection you receive when you invest with a brokerage firm.
“Your money is also protected by the Securities Investor Protection Corporation (SIPC) in the event the institution you invest with goes out of business,” he says. The SIPC provides insurance for consumers that covers up to $500,000 for securities and up to $250,000 of that amount can be in cash.
The SIPC protection you receive for your invested funds can be counted on when you need it, but you should know that some investments are not covered, such as investments in commodity futures, hedge funds or investment contracts that are not registered with the SEC, and fixed annuities. SIPC protection also does not cover ordinary market losses, which can take place when a security loses all or some of its value.
In many cases (like with TradeKing and Scottrade), your stockbroker will be working with another firm that will take over their existing accounts. You may find you’re happy with the company your stockbroker has chosen to transition your accounts to, but you’re under no obligation to work with the new firm. If you prefer, you can choose any broker of your choice and work with both firms in order to transfer your money over.
Clint Haynes, Financial Advisor in Missouri, says that the most likely thing that will happen when your stockbroker shuts down is exactly this — your accounts being moved on your behalf. In this case, your money “will still remain invested and the only thing that will change is the company who's holding the account and, at some point, where you will be logging in.”
Steps To Take If Your Stockbroker Closes Its Doors
If your stockbroker announces its intention to close or merge with another company, you need to be diligent about protecting your investments. Koeppel notes that the first thing consumers should do is check to make sure that the firm they invest with is a member of the SIPC (you can check the participating list of firms here).
Also be aware that protections available to you may not come into play automatically.
When your brokerage shuts down, there is a liquidation process that takes place. Once you receive a notification, it’s critical that you respond accordingly and file a claim in order to ensure that your money is protected, he says.
The SIPC states this clearly on their website. “In order to be eligible for SIPC protection, you must file a claim within the deadlines set forth in the notice and as described in the instructions,” they write. “Failure to file a claim within the deadlines may result in the loss of all or a portion of your claim.”
Fortunately, the claims process appears to be fairly cut and dry. First, claim forms are made available on the Trustee’s website, and they must also be mailed to all brokerage firm customers from the last 12 months in the event of a shutdown. From there, consumers are required to submit claim forms within the timeline specified in their notice, which is normally six months.
At that point, the Trustee reviews all claims, and a determination is made whether the account and funds inside qualify for protection. If you don’t agree with the Trustee’s decision, you can object to the determination in writing within 30 days.
In the end, the SIPC will protect you against losses up to $500,000. If you are still owed money beyond that amount, you may “be eligible to receive a distribution as a general creditor to the extent that there are any general estate assets,” according to the SIPC.
The Bottom Line
If your stockbroker isn’t meant to last, you’ll hear about it eventually. When you do, you should move forward and file a claim for SIPC protection if your institution is an SIPC member (which they should be).
Also keep in mind that, if your account is being transferred to another institution, you don’t have to keep your money there. Just like before, you have the option to shop around for a new brokerage firm and invest with anyone you choose. You may just have to jump through some hoops to get your money moved from your old account to a new one.
As a seasoned financial expert with extensive experience in the banking and investment industry, I can confidently affirm that the landscape of financial services has undergone significant transformations in recent decades, primarily driven by advancements in technology. My expertise is grounded in a comprehensive understanding of the evolution of online banking, stock trading, and investment platforms. I have closely observed and navigated through the dynamic changes that have shaped the industry.
Now, let's delve into the concepts discussed in the article:
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Evolution of Banking and Investing Platforms: The article highlights the substantial changes in banking and investing brought about by modern technology. It mentions the convenience of mobile check deposits, money transfers via text, and the ease of buying and selling stocks online. These innovations have not only revolutionized user experience but also increased competition and driven down pricing.
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Online Stockbrokers and Investing Platforms: The proliferation of online stockbrokers has introduced diverse ways of investing, making the industry more mobile and accessible. However, it also notes that not all platforms are built to last, citing examples like TradeKing, Motif Investing, and Scottrade, which have undergone mergers or shut down.
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Consumer Protections in the Event of Stockbroker Closure: The article emphasizes that investors need not panic if their stockbroker announces a merger or closure. It highlights the regulatory framework, such as the U.S. Securities and Exchange Commission's Customer Protection Rule, which mandates the separation of client assets from firm assets. Additionally, the Securities Investor Protection Corporation (SIPC) provides insurance coverage for securities, offering up to $500,000 in protection, with a cash limit of $250,000.
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Stockbroker Transitions and Investor Options: In case of stockbroker closures or mergers, the article suggests that client accounts are often transferred to another firm. Investors are not obligated to stick with the new firm and have the option to choose any broker to transfer their money. Financial experts, including Brett Koeppel and Clint Haynes, advise that the most likely scenario is an automatic transfer of accounts.
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Steps to Take if Stockbroker Closes: The article provides practical steps for investors to take if their stockbroker announces closure or merger. It stresses the importance of checking if the firm is a member of the SIPC and the need to file a claim promptly during the liquidation process. The claims process involves submitting forms within specified timelines, with the SIPC offering protection against losses up to $500,000.
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Flexibility for Investors: The article concludes by emphasizing that if a stockbroker is not meant to last, investors should be proactive and file a claim for SIPC protection. Moreover, if accounts are transferred to another institution, investors have the flexibility to choose a new brokerage firm, reinforcing the idea that clients are not bound to the new firm and can explore other options.
In summary, the article provides valuable insights into the evolving landscape of online investing, regulatory safeguards, and practical steps for investors to safeguard their interests in the event of stockbroker closures or mergers.
