Online broker and safety
Question: You give great advice, Chris. Is it safe to open a Roth IRA with a well-known online broker? I need to put my money to work following a recent inheritance. I'm 66, in good health, and a self-employed business writer. I plan to move a couple small IRAs to the online broker, convert them to a new Roth, and combine that capital with annual contributions. Yes, I'll pay conversion taxes from my savings. I intend this to be a long-term investment. My early purchases will be government TIPs (thanks to you!) and dividend stocks that perform well in good times and bad. My concern is a threat to my investments in the case of online fraud or company failure. I know the Securities Investor Protection Corporation (SIPC) will cover some investments in some circumstances. But a recent high-profile case involving consumers not protected by the SIPC because they held fraudulently issued CDs in their possession is worrisome. The industry seems to leave itself lots of wiggle room. My intended broker offers to compensate investors in the case of online fraud, but only at the company's discretion. And only if the investor proves compliance with a daunting list of security procedures and software updates. What's a guy to do? John, Wilmette, IL
Answer: I like your investment strategy. You're right to be concerned about financial safety and soundness considering all the financial and economic turmoil of recent years. Still, you have a lot of protections that go beyond SIPC, from how your money is segregated from the brokerage business to the extra layers of insurance against losses that most brokers buy. (And if it doesn't don't do business with them.)
The industry does weight the odds in its favor. I guess that isn't a surprise. That's why I like adding an additional layer of protection, which it looks like you are going to do: Go with a financial institution with a blue-chip reputation to preserve, deep financial pockets to withstand tough times, and a well-deserved name for providing good service to its customers. It isn't a foolproof method, but I think it's reassuring to stick with well-known mutual fund companies, national or international brokerage houses, FDIC insured banks, and the like.
By the way, when it comes to CDs, I would prefer that you buy those directly from a FDIC insured bank (or its credit union equivalent) and stay under the $250,000 limit. I don't any reason to take any risk with the money you put into CDs. Yes, you will give up some yield with this very conservative approach--and it may mean that you have more accounts at different institutions--but that's an okay price to pay. The money will be there when you need it.