How Safe Is Your Brokerage Account?

When a brokerage firm fails, customer assets are usually still safe—up to a point. All brokerage firms that do business with the public are required to be members of the Securities Investor Protection Corp., a nonprofit organization that provides some insurance to investors if the firm becomes insolvent.

SIPC covers the replacement of missing stocks and other securities up to $500,000, including $100,000 in cash claims. Investors typically receive their assets in one to three months once liquidation is initiated. The cash comes from a reserve fund authorized by Congress specifically for investors at failed brokerage firms.

But customers get these payouts only as a result of the firm's failure or special financial circumstances in which customer assets are missing, like theft, conversion, or unauthorized trading. SIPC does not reimburse ordinary market loss or investments not registered with the Securities and Exchange Commission, like hedge funds, fixed annuities, commodity futures, currency, or investment contracts. People with significant ownership of the failed firm, like directors, officers, or partners, are ineligible for this protection.

Customers who have multiple accounts with the same brokerage firm, such as an IRA, joint account with a spouse, and an individual account, for example, are eligible for the $500,000 coverage of each account or the replacement of $1,500,000 worth of assets.

Here's a list of tips for brokerage firm liquidations and a guide to avoiding firms that pose a financial or fraud risk to investors.