The Dirty Secret of Stockbrokers
Another brokerage firm ceased trading this week. 140 stockbrokers idled because of a single arbitration award. What does it take to shut down a multi million brokerage firm? Not much.
We trust stockbrokers to handle our life savings. Many brokers have a book of business measured in the tens of millions of dollars. Yet the brokerage firms that employ them are only required to have net capital of just $250,000 and many firms don’t carry liability insurance! That is the industry’s dirty secret.
Earlier this week, Fintegra was forced to halt operations. Brokers were greeted with a memo Monday morning saying the firm fell below net capital requirements because of an arbitration decision.
Fintegra’s end of the year SEC filings showed net capital of $714,000. That’s only $5000 per broker. Not much!
If you think this is an aberration, you are unfortunately wrong. In November, Resource Horizons Group shuttered its operations after being hit with just two judgments. That company employed 200 brokers.
The news is devastating for employees of these firms of course, but good brokers can easily take their book of business and clients to another firm. It’s the customers with claims against the firms are often left holding the bag.
At the time Fintegra ceased trading on Monday, we believe the company still had 4 pending claims against it. How will those claims get paid? How will the first claim get paid?
Unfortunately, customers should do their own due diligence not only on their investments but on their stockbrokers too. With so many brokerage firms closing down, don’t forget to research the firm as well. The Financial Industry Regulatory Authority [FINRA] makes disciplinary and complaint records available for free on its BrokerCheck system. FINRA’s system is a great start but doesn’t provide insurance information or net capital information.
If there is any silver lining, most customer accounts are protected by the SIPC but that insurance doesn’t cover claims against bad brokers, unauthorized trades and unsuitable investments. If your broker screwed up, you may simply find yourself screwed.
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