Investing

How do you manage the risk of your 'broker going bankrupt'?

  • Last Updated:
  • Dec 6th, 2016 8:36 pm
Tags:
[OP]
Deal Addict
User avatar
Apr 23, 2009
1778 posts
774 upvotes

How do you manage the risk of your 'broker going bankrupt'?

Question for savvy investors on RFD with large equity portfolios - How do you manage the risk of your 'broker going bankrupt'?

As you would probably know, the stocks are held by your broker in 'street name' and not in your own name. I know there is CIPF that guarantees up to $1 million but when you read the coverage conditions, I see many risks there. For instance, any loss due to fraud is not covered. In other words, if your broker committed fraud on your securities, there is no recourse. Further, no coverage unless your broker actually goes 'bankrupt' and into liquidation. In other words, if broker is still solvent after screwing you over, you have to sue broker to recover losses. CIPF will not cover your losses.

I have also heard that only cash accounts are covered (i.e. margin accounts are considered part of general pool which means you are treated as 'general creditors'). I don't think this is correct but who knows......it seems complicated enough to be a concern.

What are some of the things you do to protect against your broker going bankrupt? How do you manage that risk?

Lastly, have you considered using DRS service such as Computershare so that you can have the shares registered in your own name instead of in your broker's name? Any pros and cons of using Computershare for your 'long-term' or 'forever' stocks ?
Why do you want to climb Mt. Everest, Sir? - Because it is there.

— George Leigh Mallory
15 replies
Member
Dec 13, 2014
375 posts
137 upvotes
Hampstead, QC
I have some big positions in DRS with Computershare as they are worth over 7 figures and wold not be covered.
Its easy to request from your broker and the fees are minimal...I believe TD charged 50 a position to transfer ( can't remember exactly )
In terms of inconvenience, if you want to sell, you have to go to the branch and request DRS be transferred to brokerage which can take up to 5 business days so you cannot sell the shares in those days.
If you want to go one step further you can request physical share certificates...divs will be mailed to you by cheque.
Deal Addict
User avatar
Dec 8, 2010
2553 posts
982 upvotes
Your holdings should be held in a trust account, not commingled with any broker's own finances.

I won't say 'can't', but about as close to it. If the broker goes, your property is still your property.
[OP]
Deal Addict
User avatar
Apr 23, 2009
1778 posts
774 upvotes
Thanks Daverobev and leflower.

Pardon my ignorance because I don't completely understand the legal ownership status and who has the ultimate control over the stocks when the stocks are held in 'street name'. So I don't know whether or not the stocks are held in trust for you separately from all other brokerage clients or together with them in one trust account. What I do know is that when a stock is held in 'street name', you are only the beneficial owner but the broker is the actual legal owner. Also, your account is just a book entry in the broker's book. Of course, there are statutory and regulatory controls in place as mandated by OSC. But risks are real for large accounts or perhaps I am paranoid?

I was just wondering if anyone here does take mitigating steps such as keeping you brokerage balances within reasonable limits (I.e. by splitting portfolio with different brokers) or using DRS services.


daverobev wrote: Your holdings should be held in a trust account, not commingled with any broker's own finances.

I won't say 'can't', but about as close to it. If the broker goes, your property is still your property.
Why do you want to climb Mt. Everest, Sir? - Because it is there.

— George Leigh Mallory
Deal Addict
User avatar
Dec 8, 2010
2553 posts
982 upvotes
ruchir wrote: Thanks Daverobev and leflower.

Pardon my ignorance because I don't completely understand the legal ownership status and who has the ultimate control over the stocks when the stocks are held in 'street name'. So I don't know whether or not the stocks are held in trust for you separately from all other brokerage clients or together with them in one trust account. What I do know is that when a stock is held in 'street name', you are only the beneficial owner but the broker is the actual legal owner. Also, your account is just a book entry in the broker's book. Of course, there are statutory and regulatory controls in place as mandated by OSC. But risks are real for large accounts or perhaps I am paranoid?

I was just wondering if anyone here does take mitigating steps such as keeping you brokerage balances within reasonable limits (I.e. by splitting portfolio with different brokers) or using DRS services.
If I had more than a million, I might, I suppose. No harm in having half a million with X, half a million with Y.

If you were to own significant sums in a single stock (why would you? Well, that's for a RodBarc thread :P), then yeah, sure, some stocks can be held directly, and even have benefits for reinvestment (eg, Fortis, Emera have discounts on shares bought through DRIP; but, some brokers will pass that on, too).

Again - the stock is held in a separate account, and is protected. Normal creditors cannot go after things held in a trust account. The company would have to be doing things really badly in order for this to be a problem. IE, illegal. You would hope that this is next to impossible.
Deal Addict
Aug 27, 2009
1459 posts
572 upvotes
West GTA
Good discussion!

We divide our assets using two big bank discount brokers (TD and RBC). I pay $10 a trade but I don't trade that often and when I do, $10 is negligible relative to the trade value plus it's tax deductible in an open account. I prefer the peace of mind over saving a few bucks in going with a Questrade or IB-type service.

I find it humorous that some here complain $10 is too much for a trade. They obviously weren't in the market before discount brokers became mainstream and even then it was $30/trade.

CIPF provides $1MM coverage per account type grouping, per individual, per institution so in actuality you get quite a bit of coverage but it depends on your level of assets and how you have it distributed.
If your broker goes bust and you are covered, I would expect that your assets would be tied up for a while. I want to have access to my securities, even my forever stocks.

The chances of a big bank brokerage going bust is quite small and if it does there are probably bigger issues to worry about.
Also, in the case of fraud, the banks have deep enough pockets to make you whole either though goodwill or via a lawsuit (presumably it'd be a class-action).
Deal Addict
User avatar
Sep 4, 2005
3250 posts
1107 upvotes
Toronto
RETD wrote: Good discussion!

We divide our assets using two big bank discount brokers (TD and RBC). I pay $10 a trade but I don't trade that often and when I do, $10 is negligible relative to the trade value plus it's tax deductible in an open account. I prefer the peace of mind over saving a few bucks in going with a Questrade or IB-type service.

I find it humorous that some here complain $10 is too much for a trade. They obviously weren't in the market before discount brokers became mainstream and even then it was $30/trade.
Hehe, the times they are a changing! Imagine the labour that had to go into a trade before the internet was around. So it's understandable why the costs have dropped so much.

Questrade has actually been running promotional ads questioning the difference between mutual funds vs ETF's and their long term costs being upwards of 30% lost in your portfolio with the ~2% annual drag.
While your example may not be the best case, anyone doing higher frequency trading those larger fee's would add up over time to significant amounts.
Sr. Member
Jan 14, 2010
685 posts
226 upvotes
Central Ontario
RETD wrote: We divide our assets using two big bank discount brokers (TD and RBC). I pay $10 a trade but I don't trade that often and when I do, $10 is negligible relative to the trade value plus it's tax deductible in an open account. I prefer the peace of mind over saving a few bucks in going with a Questrade or IB-type service.
Don't mean to drift thread, but is this true? Is it specific to a margin/taxable account? This says differently:

Non-Deductible Carrying Charges and Investment Expenses include
-safety deposit box fees incurred for the safe-keeping of your investments - this is no longer an allowable deduction for tax years beginning on or after March 21, 2013. Prior to that it was deductible on line 221 of your tax return.
-fees paid for general financial planning
-administration fees paid for registered accounts such as RRSPs
-interest on money borrowed to contribute to RRSPs, TFSAs or DPSPs. However, if investments are purchased with borrowed money in a non-registered account, and transferred to the RRSP after the loan is repaid, the interest is tax deductible. If part of the loan is still outstanding when the investments are transferred to an RRSP, the interest is no longer deductible.
-brokerage fees or commissions paid when buying or selling securities. These costs either reduce the proceeds from securities sold, or increase the cost of securities purchased.
-interest on money borrowed to purchase a life insurance policy
-subscription fees paid for financial magazines, newspapers or newsletters
Deal Addict
Aug 27, 2009
1459 posts
572 upvotes
West GTA
Super_Chicken wrote: Questrade has actually been running promotional ads questioning the difference between mutual funds vs ETF's and their long term costs being upwards of 30% lost in your portfolio with the ~2% annual drag.
Not sure how mutual funds vs ETF's figures into this discussion as I don't think I referenced them, implied or otherwise.
Super_Chicken wrote: While your example may not be the best case, anyone doing higher frequency trading those larger fee's would add up over time to significant amounts.
True enough. Within the context of this thread my point is that for me, I mitigate the risk & effects of broker bankruptcy (and/or fraud) by sticking with the big boys and I'll happily pay the larger trading commissions, which in the overall scheme of things, is minimal since I don't trade much.


RETD wrote: I pay $10 a trade but I don't trade that often and when I do, $10 is negligible relative to the trade value plus it's tax deductible in an open account.
cocodc wrote: Don't mean to drift thread, but is this true? Is it specific to a margin/taxable account?
I use the term "tax deductible" loosely. You get to reduce your reported capital gain by your transaction costs.
Sr. Member
User avatar
Jun 27, 2007
579 posts
112 upvotes
Toronto
Hi Super_chicken,

Thanks for the shoutout! We’re glad the message in our ads is coming through loud and clear. We definitely want Canadians to ask tough questions about their money and the fees they are paying on their investments.
Deal Fanatic
User avatar
May 11, 2014
5325 posts
6977 upvotes
Rankin Inlet, NU
One thing to note about CIPF, some brokerages purchase more insurance with them than others. Eg.Questrade covers up to $10 million if Im not mistaken.
Support your local Credit Union!

Sask Pension Plan Upto $7000/yr in Credit Card spending on RRSP contributions
http://forums.redflagdeals.com/sask-pen ... ns-2167222
Sr. Member
User avatar
Jun 27, 2007
579 posts
112 upvotes
Toronto
xgbsSS wrote: One thing to note about CIPF, some brokerages purchase more insurance with them than others. Eg.Questrade covers up to $10 million if Im not mistaken.
Hi xgbsSS,

You’re right! We offer $10 million in private insurance in addition to the $1 million from CIPF. You can read more about it here: http://www.questrade.com/legal/member_iiroc_cipf
Deal Addict
User avatar
Mar 16, 2010
3325 posts
1880 upvotes
Don't own shares in the company you have your brokerage account with. Risk hedged lol.
Jr. Member
Nov 7, 2015
162 posts
19 upvotes
Vancouver, BC
That's why you own precious metals, physically I mean if brokerages are going bankrupt you can bet your self that would be the breaking point for the price of metals to go hyperbolic.
Member
May 27, 2007
423 posts
36 upvotes
Honestly, unless you are with a very small broker, I would not worry about bankruptcy risk. For sure a big bank broker will not defraud you. So if you are really concerned, go there.

Regarding DRS, I do this. Pros are that it's free to buy shares and sometimes there is a discount. But cons are that it's pretty slow and you do t control what price you buy at. Fees can exist when selling and the paper work is hell.
[OP]
Deal Addict
User avatar
Apr 23, 2009
1778 posts
774 upvotes
I have brokerage accounts with Interactive Brokers, Virtual Brokers and Questrade. Don't know if you would consider them as small brokers............

I mostly own dividend stocks and like the fact that I can reinvest small dividend amounts for cheap with these small brokers. With TD I would have had to wait until I accumulated sizeable dividend amount to make it worthwhile paying $10 in commissions. With penny commission I have the flexibility to buy whichever stock is on sale on a given day. With TD I found the stock prices moved away unfavourably while I waited and collected enough dividend to justify paying $10 commission. I try to keep transaction cost below 1% which would mean I would need at least $1000 of cash dividends to buy with TD.


ghost416 wrote: Honestly, unless you are with a very small broker, I would not worry about bankruptcy risk. For sure a big bank broker will not defraud you. So if you are really concerned, go there.

Regarding DRS, I do this. Pros are that it's free to buy shares and sometimes there is a discount. But cons are that it's pretty slow and you do t control what price you buy at. Fees can exist when selling and the paper work is hell.
Why do you want to climb Mt. Everest, Sir? - Because it is there.

— George Leigh Mallory

Top

Thread Information

There is currently 1 user viewing this thread. (0 members and 1 guest)