As you might already know, investing and trading securities carries with it various kinds of risks. One particular question that might have crossed your mind, is “what if my broker goes out of business?” Since M1 finance is a relatively new brokerage firm, you might be skeptical about its longevity and what will happen to your assets if M1 should fold. So, what happens if M1 finance goes out of business?
If M1 goes out of business, your assets are safe because you still retain ownership of the assets. U.S. Federal law as well as the Securities and Exchange Commission require all broker-dealer firms such as M1 to hold assets of clients in separate accounts. Because of this law, M1 is expected to keep their client’s assets and their assets in different accounts so their liability does not affect you.
In this article I am going to talk about:
- M1 finance as a broker-dealer firm.
- How SIPC helps investors recover their assets from liquidated brokers.
- How FIDC helps investors recover their funds from liquidated brokers.
- What happens if M1 finance is taken over by another brokerage firm.
M1 Finance as a broker-dealer Firm
Most brokerage firms operate as broker-dealers. This means that they facilitate buy and sell orders between buyers and sellers of securities. They pair a buyer looking to buy securities with an available seller. M1 finance works in collaboration with Apex Clearing Corporation to execute these orders.
Apart from serving as a clearing house for all transactions with M1 Finance, Apex also holds all M1’s client’s assets in a separate account. This is in line with the U.S. federal law that requires all broker-dealers to hold their client’s assets in separate accounts. With this arrangement, even if M1 goes out of business, your assets are safe because M1 finance never had direct custody of the assets in the first place.
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How SIPC Helps Investors Recover Assets from Liquidated Brokers
The Securities Investor Protection Corp (SIPC) is an organization that was created to safeguard the securities of investors from theft. You might be wondering, how the SIPC helps if your assets are already in an account separate from M1’s account. Well, sometimes brokers can indulge in illegal transactions or theft of your securities. This is where the SIPC comes into play.
The SIPC protects the securities of investors at different financial institutions. It protects against the theft or loss of securities and will reimburse victims up to the sum of $500,000. Apex Clearing Corporation which holds your funds for M1 is a member of SIPC. If M1 finance goes out of business, the SIPC will be involved in the insolvency process.
During the insolvency process, if some client’s assets are missing due to theft or illegal trading, SIPC is there to make sure that such clients are made whole again. In situations where there are no available assets that can be used to make the client whole again, the SIPC will refund that particular client the value of the assets up to $500,000.
The Madoff case is a very good illustration of an instance where the SIPC reimbursed clients that suffered the loss of assets due to theft. Bernard Madoff ran one of the biggest Ponzi operations in the U.S. and defrauded his investors of over $50 billion. When the scheme was uncovered, the SIPC stepped in and Madoff’s victims were reimbursed up to $500,000.
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How FDIC Helps Investors Recover Funds from Liquidated Brokers.
The Federal Depository Insurance Corporation (FDIC) is an initiative of the U.S. government which was founded with the aim of safeguarding deposits made into federally registered banks. The FDIC was formed as a reaction to the frequent shutdowns of multiple banks during the 1920s. The FDIC insures billions of dollars in deposits made by investors.
It insures each customer at a bank up to the sum of $250,000. This insurance of $250,000 is per individual at a bank and not per account at a bank. Apex Clearing Corporation is the agency in the custody of your funds deposited at M1 finance, and they are also members of the FDIC.
When you deposit your funds into an M1 Finance brokerage account, they are held in custody by Apex at any FDIC-insured bank. In any event that where the bank your funds are in is liquidated, you are not at loss. Funds that you deposit with M1 finance are always eventually protected with the FDIC and you will be indemnified up to the sum of $250,000.
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What Happens if M1 Finance is Taken Over by Another Brokerage Firm
It is not unusual for financial institutions to get distressed and fold up. However, it is not all the time that companies go out of business. Sometimes, they are either merge with another firm or they get acquired completely by another firm. If M1 finance merges with another firm or gets acquired by a bigger firm, your securities and funds are safe and will still belong to you.
Your securities and funds will be transferred to a new brokerage firm. The only possible inconveniences are;
- M1’s name may change to that of the new firm.
- Your account and its details will be transferred to the new firm. However, if you do not like the policies of the company or their terms and conditions, you will have the option of pulling your assets out and depositing them with your preferred broker or you can choose to stay at the brokerage firm.
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If M1 finance goes out of business you don’t need to fret because it will have no negative financial effect on you. You will still have ownership of your securities and funds because M1 finance is mandated by law to keep your assets in a separate account from theirs. Even if they break the law and steal your funds, the SPIC and FDIC will reimburse you up the sum of $500,000 for securities and $250,000 for cash.
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Till next time…
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