I don't have a perfect answer, but here are a few thoughts.So how can we choose a safe broker?The fact that a firm is old or has a lot of money in its hands does not make it honest or trustworthy. Frankly a core aspect of the Bogle revolution was understanding that old and prestigious firms managing most of the money were inferior to a simple index fund. Really the trustworthiness of a firm is independent of those factors.
I agree that old, large, and seemingly reputable is no guarantee. Though some old firms have managed to not go bankrupt through multiple financial crises. We could avoid companies which had to be rescued in the past, such as Citi.
A large firm might be subject to more regulation and/or get more attention from the SEC. Perhaps serious problems are more likely to be addressed. And a bailout more likely, or SIPC intervention more careful and thorough.
Maybe it helps to choose a conservative company. If Morgan Stanley/Etrade or Merrill/BofA have a history of aggressive proprietary trading (do they?), then maybe they still have a culture of risk taking.
(Choosing a safe broker might not be the first consideration in being safe, but it’s something I’m curious about. Of course it should help to focus on simple and traditional savings or investments that both firms and regulators have long experience with, and to be careful about brokerage assets that aren’t directly held.)
1.Incentives matter. While Vanguard is not perfect and there can always be conflicts of interest, the fact that the firm is owned by the fund holders is distinct from other brokerages and is one reason I have more faith in Vanguard than others.
2.Diversification matters. Diversification is a clear lesson from Yotta, but its also a basic fundamental of investing. Would you buy 1 stock for your entire portfolio? Obviously not. You diversify. Likewise with brokerages. If you have assets spread between at least two, preferably more places the odds of you loosing access to all funds is reduced.
3.Past performance is not indicative of future results. Every firm has weathered every storm since its founding until it doesn't. Furthermore, weathering 2008 means little about today. Management likely has changed over significantly, business may be completely different, etc. Honestly firms thought invincible are almost worse (Titanic effect) than those that are seen as vulnerable (to a point of course, if its about to default that is actually a problem).
Statistics: Posted by rogue_economist — Thu Jun 27, 2024 11:41 pm — Replies 184 — Views 14436