Brokerage Failure: What Happens When Your Broker Crashes and How to Protect Your Money

When a brokerage failure, the collapse or insolvency of a financial firm that holds your investments. Also known as broker insolvency, it’s not as rare as you might think—over 100 U.S. broker-dealers have failed since 2000, including big names like Lehman Brothers and MF Global. Most investors assume their stocks and cash are locked away safely, but the truth is, your money lives in a complex web of accounts, sweeps, and custodians—and if the broker goes under, you could lose access overnight. This isn’t about fraud or hacking. It’s about structure. When a brokerage fails, your assets are supposed to be protected by the SIPC, a nonprofit corporation funded by brokerages to return customer securities and cash if the firm collapses. But SIPC doesn’t cover market losses, and it has limits: $500,000 per account, with only $250,000 for cash. If you have $1 million in a single account and the broker fails, you’re only guaranteed half of it—unless the firm had enough extra assets to cover the rest.

That’s why knowing where your money sits matters more than the broker’s brand name. Many brokers use broker cash sweeps, automatic transfers of idle cash into FDIC-insured bank accounts. That sounds safe, right? But here’s the catch: if the broker sweeps your cash into one bank, and that bank fails, your FDIC protection only applies up to $250,000 per bank, per person. If your broker sweeps $1 million into a single bank, you’re exposed to $750,000 in risk. Worse, if the broker itself is insolvent, you might not even get your cash back quickly—SIPC takes weeks or months to sort things out. Meanwhile, you can’t trade, withdraw, or even check your balance. This isn’t theoretical. In 2020, a small broker failed and left hundreds of clients locked out for over six months.

So what can you do? First, check if your broker is a SIPC member—every legitimate U.S. broker must say so on their website. Second, spread your assets across multiple brokers if you have over $500,000. Third, avoid letting large sums sit in cash sweeps unless you know which banks they’re going to. Some brokers partner with multiple banks to maximize FDIC coverage—you should ask them for the details. And finally, never assume your broker is too big to fail. Even giants like Fidelity and Schwab have had near-misses. The system works if you understand it. If you don’t, you’re gambling with your portfolio.

Below, you’ll find real guides on how to spot risky brokers, how cash sweeps really work, what to do when your account freezes, and how to structure your holdings so a single failure won’t wipe you out. These aren’t theory pieces—they’re tools you can use today to make sure your money survives the next brokerage crash.