Don't panic if your broker's broke or sold

Closeup of stock certificate

If your stockbroker's in financial trouble, you might be tempted to cash out and stuff your savings in a mattress.

That's not necessary. Really.

You own the stocks, bonds, mutual funds and cash in your account, not the bank or investment firm that buys and sells on your behalf.

That's the case even if your accounts are at Merrill Lynch, which was bought by Bank of America, or at Lehman Brothers, which filed for bankruptcy.

Panic selling can only lock in losses and trigger unnecessary fees and taxes.

The key thing to know is that security laws forbid brokers from mixing their money with your money. And it's their funds that are subject to bankruptcy proceedings, not yours.

"Whether Lehman is there as your broker or not does not change that you own the shares," says Joshua Kadish, a CFP with Retirement Planning Group in Northbrook, Ill.

Lehman Brothers is a member of the Securities Investor Protection Corp. (SIPC), as is any firm that trades stocks.

The SIPC is to stockbrokers what the FDIC is to banks, which is to say that it protects savers and steps in when firms are in trouble.

When a brokerage fails, it transfers your accounts to another firm so that you can access your investments. When that happens, you can continue with the firm the SIPC chose or move your business someplace else.

If it turns out that a brokerage goes bankrupt and was breaking the law by mingling its funds and yours, the SIPC would cover your investments up to $500,000.

Let's say your broker was dipping into your account to pay its expenses. If the SIPC finds that you're missing 1,000 shares of a stock, it will replace them.

In the case of Lehman Brothers, the SPIC says the investments of its 83,000 customers are accounted for at both of its brokerages -- Lehman Brothers Inc. and Neuberger Berman LLC.

The brokerages are open and operating, allowing customers to trade and move money into and out of their accounts, just as they could before the bankruptcy filing.

When a broker such as Merrill Lynch is sold, your account is simply transferred to the new owner. It's not much different than when the bank where you have a checking account changes hands.

"The name on the door can change or go away forever, but ultimately if you have stocks, bonds, cash, or mutual funds that are in brokerage firms, there's really not much to worry about," Kadish says.

All you have to do is pay close attention to anything your new company sends about changes in the policies and fees on your account.

You don't have to stay with the new owner. But until you have time to evaluate and make a decision about who you want to handle your portfolio, rest assured -- it's not going anywhere.

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