Hey guys, it's Sasha What happens to your investment if your broker collapses? What happens if the fund manager of a fund or the ETF that you're invested in goes under. For example, what happens if Vanguard or State Street or BlackRock goes under and you happen to be invested in a fund like Vu or Sby or Ivv? the Vanguard S P 500 Index by each of those? And what about cash? What happens to your cash if the broker collapses? Even more interestingly, what happens to your cash if the bank that your broker uses collapses because at the moment, Banks seem to be collapsing roughly every other day and you might not have thought about this risk. But what if the bank that your broker uses goes under? or even worse, what if the custodian that holds shares on behalf of your broker collapses? Now usually these questions would not be something people really think about because it is very rare for large established financial institutions to collapse. But just yesterday as I'm recording this video, Credit Suisse collapsed after 167 years in business and their investors got shafted and forced to accept a massive loss on the share price and everyone who held additional Tier 1 bonds issued by Credit Suisse has now lost a hundred percent of their investment.

So I Guess these days anything is possible. So let's discuss all of these scenarios and what would happen to your Investments if some of these institutions were to collapse. Just a quick reminder: I am going to go into a lot of detail here, but I am not your financial advisor I am a random guy on YouTube sharing useful insight and information. If you do need the legal or financial advice on any of these topics, please make sure you go and seek the help of a suitably qualified professional.

Now, first up, what happens if your broker goes under? Well, the good news is that the answer is nothing much. The system is pretty much identical in the US UK and many other countries, and the stocks and shares that you hold with the broker are protected in two different ways. First up, unlike a bank, the shares that you own in a broker account are yours and yours only. When you have a bank account like a checking account, the cash that you keep in that account is not yours.

Instead, the cash technically belongs to the bank, but at the same time, the Bank owes you the equivalent of that cash. That's why in the balance sheet of any Bank you can see that they have a whole bunch of assets and a massive pile of liabilities. Those liabilities include depositors keeping their money with the bank. So when you put money into the bank account, you are basically giving the bank a loan and if the bank fails, then you just become one of the creditors.

Now, FDIC Insurance means that balances of up to 250 000 in the US are protected inside Banks and in UK that's up to 85 000 pounds. But in recent bank collapses, the US government stepped in and guaranteed deposits above 250 000. Now, even without that guarantee, if the bank was to go under, there would usually be an extremely high likelihood of recovering all or almost all of your assets eventually, because assets within a bank don't tend to just magically disappear unless there is some very, very unique cases of fraud. Now, both your shares and your cash held with a broker do not belong to the broker.

You are not lending the broker your assets, and because of that, the broker is legally obliged to keep your shares in a segregated custodian account. and they have to keep your cash in a segregated bank account. The reason of those are segregated is that the broker does not have any ownership or right to your cash or your shares. The shares are often kept in a nominee account, So technically all of the assets are then Pulled Under The name of your broker and the custodian will not know specifically that out of all of those assets, the trillions of dollars, you happen to own 1.2 shares of Tesla, but you will have statements and other evidence so that even in the worst possible case scenario, you will be able to lay claim towards yours from within.

That, in case all of the data collapsed together with a broker, for whatever reason, and in the event that your broker goes bust, you will be able to reclaim both the shares and the cash because neither of those are part of the broker's Assets Now On top of this, there is a second layer of protection because all brokers in the US are members of the Securities investor Protection Corporation Sipc and this is basically an insurance policy for up to five hundred thousand dollars and even your broker goes bust. So if there is a problem however unlikely it is with retrieving your cash from the segregated bank account or your stocks from the custodian. You can get compensated up to five hundred thousand dollars. So the good news is that the cash in shares you own inside a broker have very strong protection.

But what if the fund manager collapses, you go and put all of your money into spy or whatever ETF because you're responsible kind of investor and then the company that manages the CTF of fun collapse as well. Again, it is good news because all regulated fund managers that issue public funds and ETS have to have a third-party custodian. Now in some cases, in many cases, that third-party custodian is a genuine third party. Vanguard for example, uses JP Morgan BlackRock uses a whole bunch of banks including Citigroup JP Morgan Bank of New York melanchorp State Street Etc You generally don't want the custodian of your shares to be the same company as the one that manages your fund because then if something was to happen, you might end up in deep doo-doo This is what happened with Bernie Madoff's funds.

He managed the funds on behalf of the customers, and he was also the custodian of the funds. And in these cases, there is the theoretic possibility of swindling money or operating some kind of Ponzi scheme or other types of scams. When the fund manager and the custodian are entirely separate entities, the risk of that happening is almost zero. Now, there are some important differences, though.

Stay Street is a custodian for many of their own funds like Sby for example, but these work a little differently. Although on the surface, they do look a lot like the Vanguard or the I shares equivalents or others. Their structure is different. They don't work as a mutual fund like the others.

Instead, those are structured as a unit. Investment Trust So When you buy into that fund, you become a member of the trust, and you get the additional protection in that your share of the fund is segregated from creditors if the worst was to happen. In fact, when you look under the Bonnet, pretty much every fund manager has a slightly different structure. It's weird.

Vanguard, for example, operates entirely differently to everybody else. Instead of Vanguard the company sitting at the top and owning all of these funds which is what everybody else does you know VT Vti whatever. Voo for the S P 500. Instead, each fund is its own entity at the top.

and together, those individual entities own Vanguard the company. And this is pretty cool because you don't have any real relationship with Vanguard the company. You're a part owner of one of the entities at the top when you invest in one of these funds. and that means that if Vanguard the company goes bust, it just means that those funds collectively stop owning the that company.

but your ownership of the shares within the fund is not affected. You'll remain a part owner of those funds at the top. So let's talk about some more complicated scenarios. What happens if the bank that your broker uses collapses? So let's say you have an investing portfolio and you're going to deposit some money into your broker.

That broker then takes your money and does the right thing and shoves it into a segregated bank account as they should and the next day there is another bank run on the bank that happens to have that account. What happens if that bank collapses? Well, it does get a little bit complicated. First up, the insurance that normally applies to investing Sipc does not apply because this is not the scenario for which it's designed because this insurance is there in case your broker goes under to deal with all of that. The truth is, if the bank that your broker uses collapses, the broker is pretty certainly also going to collapse.

But we have already talked about what happens in that case. So what if the Bank collapses, but mysteriously your broker does not. Maybe they held your shares in One bank, but personally, like the company used a different bank and so they were okay. Well, the money held in the segregated account.

The bank is kept in a special form of account that is pulled across all the different depositors together into one entity. and here you as the owner of a part of the money do get FDIC Insurance on your part of the cash. and this should really cover it for pretty much a hundred percent of cases because if you have a brokerage account I am guessing you're not keeping hundreds of thousands of dollars sitting there. You probably have a brokerage account because I don't know you want to invest in stocks, so most people will usually only have relatively small amounts of cash in the account at any one time.

There is one little thing you need to be mindful of though, because if the custodian Bank just happens to be the same bank where you keep, uh, saving some other kind of cash, if that Bank was to collapse, then you would be the part owner of all of that poured money together. So in that case, all of that money will be added up and if the total is then over the 250 000 threshold then you might be in trouble. The same thing applies in the UK If The custodian Bank happens to be The same bank that you bank with. The total amount of money has to be under 85 000 pounds for you to be able to get your money.

So one important thing to consider for some people, um, not something that most people really will ever have thought of. And now the big one. What if the custodian that holds shares on behalf of your broker collapses? Well, this one has two very different answers. The first is the technical answer and the second is the reality answer I'm gonna give that one in a second.

The technical answer is if the shares that you own, those shares will ultimately be held by one of the big custodians, Maybe there's going to be an intermediary, but most will ultimately sit with a depository Trust Company DTC or one of the others. And if whoever the intermediate injury custodian is, if they go bankrupt, those shares would still consid continue sitting there in your name and you should eventually have a way of getting access to them. There aren't very many cases of this happening in the past, so we don't have examples, but in theory you should be just fine. But what if the DTC itself collapses? Well, this is the time for the reality answer.

If one of the big custodian institutions like the DTC who happen to own you know, control all of the stocks. Most of the stocks that people own all over the world. They control the Bond markets, money markets, many, many, many different things. If that guy collapses, you probably will not be worrying too much about what happens with your stocks, because if that happens, the entire Global Financial system will completely fall apart immediately.

This would immediately evaporate every single Investment Company every single Bank pretty much all of your financial assets and this would be the case all over the world. So if that was to happen, I would probably not worry too much about what happens with your 1.2 shares of Tesla but instead I would be packing your wife, your kids into your car, maybe your pets. Bring as much food and water as possible and head to the most secure, secluded place that you can think of and then see how good you are at defending against Anarchist hordes and farming your own food. But on the basis that this does not happen, it's good to know that there are a lot of Protections in place in every other scenario for investors.

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