Provider problems?

[Guest travler]

What would happen to an IRA if the custodian/provider went belly-up. As the funds are actually in stocks/mutuals, etc., and not the provider itself, would everything be lost? I'm considering opening a Roth w/ E-Trade and am concerned about its long-term existence. Thanks

[mbozek]

Accounts at Stock brokers/dealers are supposed to be covered by SIPC which is similar to the FDIC for banks. Accounts are protected for up to 500K. U should ask E trade if they belong to SIPC. Some brokers also have private insurance above the SIPC limits.

[John G]

A good question.

Your greater risk is of making poor investment choices. Stocks are inherently more risky than mutual funds because of the diversification issue. If you own 10% of ENE (Enron) then 10% of your assets are erased. It would be unlikely that any mutual fund ever held that high a percent of ENE, not even Janus funds which owned a bunch. But, every year a small fraction of publicly traded investments go bankrupt or default on payments.

You said that you were considering E-trade and might hold mutual funds. Well, the fund assests are the fund rather than at Etrade. What would typically happen if a brokerage ran into trouble is that they would either be bought out by another firm or the government would step in to reassign the assets and accounts. This happens fairly rarely. The risk is more related to the time period when things are in transition rather than outright loss. For example, you might not be able to trade for weeks or get access to your funds. All in all, this is an area of low risk.

Fraud is another very slight area of risk. You should always check your statements to make sure transactions have been posted. If anything looks odd, like the print job, envelop, method or mailing, you should use a phone number from an outside source like WSJ or magazine to call and confirm the status of your account. Insurance held by the broker will cover fraud as long as you can demonstrate that the person you did business with was an employee.

If you are concerned about Etrade, spend some time reviewing what analysts are saying about the stock. Check earnings. Look at recent news releases. You can never be 100% certain about every detail, but I think you can get reasonable assurance that the firm is functioning.

On Sept 11, some brokerages suffered tremendous losses of personel and computer facilities. Sandler O'Neil was one of these firms. There were many others. Wall Street reacted in a heroic way. Many firms gave phones, computers and office space to companies that were hard hit. They often loaned personel and in some cases helped them complete deals that were in the works at the time the planes hit. It is not business as ussual, but I think this recent tragedy shows how Wall Street can solve nasty situations. There were accountants, programmers and sales staff on Wall Street that worked as hard as the WTC rescue workers to put things back together is a very short time. A friend of mine who is mgmt consultant to the finance industry told me that all computer records must be maintained at an operable duplicate facility over 300 miles from Wall Street. I believe this is an SEC rule designed to allow recovery from a nuclear attack.