How Do You Know if Your Brokerage Firm Is Safe? (2024)

Investing in the stock market can be a great way to grow your wealth. But before you decide to open an account with a brokerage firm, it's important to verify that the firm is safe to do business with. There is always risk in investing, so nothing can guarantee you don't lose money when buying a stock, but purchasing a stock through a shady brokerage firm can add even more risk of losing your hard-earned money. Here's what you should look for before choosing a brokerage firm.

What is a brokerage firm?

A brokerage firm is a professional service provider that acts as an intermediary between buyers and sellers of financial products such as stocks, bonds, and mutual funds. Some full-service brokerage firms provide advice on which securities to buy or sell as well as offer financial planning services.

Some are DIY brokerages, like Robinhood, that only act as a go-between for you and a stock exchange, providing no personalized advice or services. They often provide research, trading capabilities, and investment tools. These are often known as discount brokerages and many, like TD Ameritrade, have brick-and-mortar offices too. Some discount brokerages are only online, like Webull.

While investors can make or lose money based on what they invest in, what happens if the brokerage firm itself fails or goes bankrupt? There are ways to ensure your money is protected if that happens, which is why you should always check on a brokerage firm's SIPC membership.

Ensure SIPC membership

The Securities Investor Protection Corporation (SIPC) is a nonprofit organization that provides protection for investors who have lost money due to broker insolvency or theft. Created in 1970, it's funded by member firms and overseen by the United States government. Similar to the FDIC for banks, the primary purpose of SIPC is to protect the interests of investors when their brokerages fail financially or there is theft involved. It does this by providing each customer coverage of up to $500,000 for securities and $250,000 for cash.

It is important to understand that SIPC does not cover any stock market losses or market volatility. And unlike the FDIC, it is not a federal agency. The SIPC also only covers broker fraud, not fund fraud, so you still have to be careful about what you invest in. A brokerage firm that is an SIPC member will have the SIPC logo, but it's a good idea to call SIPC or visit their website for a list of members to verify.

This is important because in 2022 multiple crypto platforms (including Sam Bankman-Fried's FTX) misled investors by stating their accounts were FDIC insured. Voyager, a cryptocurrency lender that went bankrupt in 2022, was accused of making false and misleading statements about its FDIC deposit insurance status on its website, mobile app, and other marketing materials. Unfortunately, anyone who opened an account with Voyager believing that FDIC would have protected its deposits were expected to only receive about half of their money back.

Check with the Financial Industry Regulatory Authority (FINRA)

In addition to SIPC, you should check with FINRA, an independent regulatory organization that helps protect investors from fraud or theft. You'll be able to see a list of complaints against your brokerage. All brokerages must also register with FINRA and provide details about their business activities and financial standing. This information can be found on FINRA's BrokerCheck website.

Research the company's history

It's also important to research the company's history. How long have they been in business? What types of investments do they specialize in? What services do they offer? Where are they based out of? Doing some background research will help you get a better understanding of who you're working with and whether they are legitimate.

Read reviews or testimonials

Another great way to verify that a brokerage firm is legitimate is by reading reviews and testimonials from customers who have used their services in the past. Many customers are willing to share their experiences online so that others can benefit from their knowledge before making a decision about which brokerage firm they should use. Reviews will give you insight into how reliable and trustworthy the company is, as well as how satisfied past customers have been with their services.

Investing can be an effective way to grow your wealth, but it's important that you do your due diligence before signing up with a brokerage firm. Taking steps such as ensuring SIPC membership, checking FINRA records, and learning more about the company will help ensure that your money is safe and secure in their hands. With these tips in mind, you should feel confident when choosing a brokerage firm to suit your needs and help you meet your financial goals.

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