Should I Avoid Investing More Than $500,000 With a Single Brokerage Firm? (2024)

Most people know that the FDIC insures bank accounts up to $250,000. But did you know that brokerage firms registered with the SEC almost always have protections as well?

An organization called SIPC — Securities Investor Protection Corporation — exists to backstop the securities and cash in your brokerage account up to $500,000. I’ll get into what the SIPC is and what it protects in more detail later in this article.

But considering that $500,000 limit, should you spread your assets between multiple brokerage firms if you hold more than $500,000 in investments?

That’s what a listener of theClark Howard Podcastrecently asked.

Should I Only Invest $500,000 in Any Brokerage Firm To Maintain SIPC Protection?

Am I in danger of losing my assets if I invest more than $500,000 through a single investment company?

That’s what a Clark listener wanted to know on the Jan. 12 podcast episode.

Gina in Ohio asked: “How dangerous is it to keep one million dollars in one brokerage account if most of the money is invested in ETFs and treasuries? Would you recommend using two different brokerage firms and investing $500,000 in each just in case one of them goes bankrupt?”

It’s “fantastic” that you have $1 million invested, Clark says. But even though SIPC exists, it isn’t your first and only shot at recouping your assets should your brokerage go bust.

Should I Avoid Investing More Than $500,000 With a Single Brokerage Firm? (1)“Even in the failure of a brokerage, your holdings are moved to another brokerage firm. The only time that your money is at risk is with flat-out theft that would be internal to the brokerage,” Clark says. “And so I would not worry about a brokerage failure meaning your money is at risk.”

What Is the SIPC?

The SIPC is a nonprofit that materialized as part of the Securities Investor Protection Act of 1970. It protects investment accounts from insolvent brokerages.

The SIPC isn’t a federal agency like the FDIC. It also doesn’t protect against a loss of value if your investments go down in price.

However, it offers up to $250,000 worth of protection of uninvested cash inside your brokerage account and $500,000 total including assets such as stocks, bonds, mutual funds and ETFs.

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Also, if you have an IRA and a taxable investment account at the same company, the SIPC treats those as separate accounts, each with $500,000 of protection.

“Virtually all broker-dealers registered with the Securities and Exchange Commission (SEC) are SIPC members,” the SIPC website says. “Those few that are not must disclose this fact to their customers.”

What Happens If Your Investment Company Implodes?

It’s scary to think about your life’s work — and the money on which you’ll rely in retirement — disappearing from your financial accounts just because a brokerage firm fails.

However, it’s extremely unlikely that a major brokerage firm will go out of business. The financial industry, especially investment companies, is highly regulated.

Even if your investment company goes out of business, you shouldn’t need the SIPC to swoop down and save the day.

Says FINRA: “In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm.

“Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers’ securities and cash segregated from their own so that, even if a firm fails, its customers’ assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency.”

Paying Too Much in Fees Likely Poses a Bigger Risk Than Your Investment Company Collapsing

It’s important to choose to do business with one of the best investment companies. Clark’s favorites: Fidelity, Schwab and Vanguard.

However, it may not be the best idea to keep more than $250,000 in cash at a specific brokerage firm. “But when your money’s fully invested, you do not have a risk,” Clark says.

Beyond that, investing through a company that charges you high or even moderate fees is much more likely to impact your long-term wealth.

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Getting charged fractions of a percent more for the right to invest may not seem as threatening as your investment company totally collapsing. Driving a car may not seem as scary as swimming in shark-infested waters, either. Yet history shows us that it’s one of the most dangerous and deadly activities, just like paying too much in fees.

Final Thoughts

It’s great that SIPC protection exists to the tune of $500,000 per account. But that’s more of a last line of defense in case your investment company becomes insolvent (extremely unlikely) and your assets don’t get transferred to another brokerage (extremely unlikely).

It’s OK to invest more than $500,000 through a good investment company.

Just make sure that you pick a company that offers low fees.

Should I Avoid Investing More Than $500,000 With a Single Brokerage Firm? (2024)

FAQs

Is it safe to keep more than $500,000 in one brokerage account? ›

The Securities Investor Protection Corporation's account insurance protects up to $500,000 per brokerage account, which is important because "if a brokerage firm or custodian fails, these funds are restored in the account, regardless of if the brokerage company or custodian is defunct," says Steven Conners, founder and ...

How much is too much in one brokerage account? ›

Since you can expect a good return over time if you make informed choices, you can't really have too much money in your brokerage account. After all, you want as much money as possible earning the highest possible returns. This is different from, say, keeping your money in a high-yield savings account.

Is it risky to have all investments with one broker? ›

Just as diversifying your investment portfolio across different asset classes mitigates risk, having accounts at multiple brokerage firms can provide a form of diversification. It ensures that your assets are not concentrated in one place, reducing the impact of potential issues with a single broker.

How much money is safe to keep in a brokerage account? ›

Holding cash here is appropriate if you plan to spend the money within a few days or would like to quickly place a trade. Assets in your brokerage account are protected up to $500,000 per investor, including a maximum of $250,000 in cash by SIPC in the event a SIPC-member brokerage fails.

Where do billionaires keep their money? ›

Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.

Is it bad to have 3 brokerage accounts? ›

There's nothing wrong with opening multiple brokerage accounts. In fact, it may be beneficial.

Should I keep all my money in a brokerage account? ›

As a general rule, unless you can leave the money invested for around two to five years, it should be in savings instead of a brokerage account. Otherwise, the risk is too high that you'll end up buying and selling at a bad time before you make enough profits to break even.

Why should no one use brokerage accounts? ›

If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.

Is an individual brokerage account worth it? ›

They can also help you reach some important financial goals that might take a long time to reach. For example, if you want to buy a house with cash or save up a very large down payment, a brokerage account might be a good option if you plan to save for about five years.

Should I have all my investments with one financial advisor? ›

By choosing a single financial advisor, you can not only consolidate all your financial information but can also keep a tab on your investments. It reduces errors and oversight and makes it easier for you to follow through with the professional's advice.

Are my stocks safe in a brokerage account? ›

Cash and securities in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC). The insurance provided by SIPC covers only the custodial function of a brokerage: It replaces or refunds a customer's cash and assets if a brokerage firm goes bankrupt.

Should I use Fidelity or Charles Schwab? ›

Overall Appeal. Fidelity and Schwab are both excellent choices. These investment firms offer thousands of funds. There are some nuances, such as Fidelity being better for crypto traders and Schwab being more optimal for futures traders.

Do millionaires use brokerage accounts? ›

Millionaires use brokerage accounts for low-cost index funds. “Buying and holding index funds in a brokerage account, it's possible to keep and grow wealth over the long term,” according to Business Insider.

Is Charles Schwab in financial trouble? ›

Schwab felt the worst of it from August 2022 through April 2023, when its bank account deposit balances plummeted by nearly $50 billion, or 32%. In other words, clients pulled funds from their bank accounts at Schwab at a pace of $5.6 billion per month to take advantage of higher-interest-earning assets.

What is the downside to a brokerage account? ›

Brokerage accounts don't offer all the services that a traditional bank offers. Brokerages might not offer additional products such as mortgages and other loans. Brokerages may not have weekend or evening hours.

Is SIPC as safe as FDIC? ›

Unlike the FDIC, SIPC does not provide blanket coverage. Instead, SIPC protects customers of SIPC-member broker-dealers if the firm fails financially.

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