Disclaimer - Brokerage Reports

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Background and Purpose. What we learned from the Great Depression, as well as the Great Recession, is that during times of severe financial distress, liquidity becomes an issue. This puts significant pressure upon the banking and brokerage systems, and many banks and brokerage firms across the United States could fail during these difficult periods.

Of course, many consider the Securities Investor Protection Corporation (SIPC) as the backstop for such difficult times. The purpose of SIPC is to afford certain protections against loss to customers resulting from broker-dealer failure. Currently, the limits of protection are $500,000 per customer except that claims for cash are limited to $250,000 per customer. The total size of its compensation fund is less than $5B, according to its 2021 annual report, which obviously would not be enough to cover losses of even a small broker. Consider what the brokerage environment will be like if we enter a prolonged bear market, as we believe will happen. We surmise that investors would prefer a safer firm holding their assets, rather than relying on a SIPC insurance system that will likely be under extreme pressure and unable to assure full repayment.

So, to aid in one of the initial steps investors can take to prepare for an unprecedented difficult financial environment, we sought to review the strength of some of the more popular brokerage firms in the United States. We reviewed those brokerage firms that provided adequate public information to assess their overall financial strength.

However, we must make it very clear that this service is NOT an investment recommendation nor advisory service. Our purpose is not to find brokerage firms in which one can invest. Rather, the purpose of this service is to assist the reader in assessing the safety of brokerage firms in the United States within which you can maintain your investment accounts.

General. The brokerage firms, accounts, products and services discussed in this report may not be suitable for all consumers. Opinion expressed is the current opinion as of the date appearing on the material only and may thereafter become outdated. Further, the information in the report has been prepared on the basis of publicly available information; internal data and other sources believed to be true and are for general guidance only, but which have not been verified independently. While effort is made to ensure the accuracy and completeness of information contained in the report, the same is not assured. You should rely on your own judgments and conclusions from relevant sources before making any brokerage or consumer decisions.

The data and opinions in this report are provided for information purpose only. It does not constitute any, recommendation or solicitation to any person to enter into any account, service, transaction, activity or strategy, nor does it constitute any prediction of a likely future outcome. Users of this document should seek advice regarding the appropriateness of the accounts, services, transactions and brokerage activities referred to in the report and should understand that statements regarding future prospects may not be realized. Opinion, projections and estimates are subject to change without notice.

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Risks. First of all, we would like to note that in contrast to the banks, US brokerages disclose much less information and, overall, they are less regulated by the government bodies. Some very large brokerages, such as Fidelity and Vanguard, do not disclose almost any data at all, while data from subsidiaries of banks, such as Bank of America Global Wealth & Investment Management and Morgan Stanley Wealth Management, are rather hard to obtain. There are only some numbers in the banks’ 10-K and 10-Q fillings. Another thing worth mentioning is that the brokerages do not disclose data on banks they are working with. This is actually a crucial point given that if a bank that is being used for sweeping money overnight has a liquidity issue itself, this can result in contagion and lead to liquidity issues at a broker. We believe the biggest risk the brokerages face is a liquidity risk. In our view, there are two types of liquidity risks for a brokerage company. First, as mentioned, if a bank that is being used for sweeping money overnight has a liquidity issue itself, it can result in contagion and lead to liquidity issues at a broker. The problem here is that brokerages do not disclose data on banks they are working with; as a result, it is impossible to make a proper assessment of this type of liquidity risk based on the publicly available information. The second type of liquidity risk generally tends to arise from a fragile business model, unsustainable revenues, weak profitability and problems with a capital position. Our methodology and ranking system focus on an assessment of this type of liquidity risk.
Read more about our Methodology and Ranking System here.

Conflicts of Interest. We and our affiliates and personnel do not receive any compensation or consideration of any value from the financial institutions based upon our analysis and this report. However, we and our personnel may have shareholder, accountholder, depositor or other customer relationships with such institutions.

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