Can brokerage firms like Fidelity, TD Ameritrade, or Vanguard fail? They seem pretty unshakable, but the recent financial crisis made it clear that even very large financial companies can fall. And over the timescale of my lifetime, it seems very possible that one could go out of business.
Brokerages are supposed to keep your money separate from theirs. So, even if they fail as a company, your money and investments are still there, and can be transferred to another brokerage. It doesn't matter if it's an IRA or taxable account.
Of course, as is the case with MF Global, if illegally take their client's money (i.e., steal), it may be a different story. In such cases, SIPC covers up to $500K, of which $250K can be cash, as JoeTaxpayer said.
You may be interested in the following news item from the SEC. It's about some proposed changes, but to frame the proposal they lay out the way it is now:
http://www.sec.gov/news/press/2011/2011-128.htm
The most relevant quote:
The Customer Protection Rule (Rule 15c3-3).
This SEC rule requires a broker-dealer to segregate customer securities and cash from the firm’s proprietary business activities. If the broker-dealer fails, these customer assets should be readily available to be returned to customers.
Yes, any company can go under. SIPC offers a level of protection. They don't guarantee against stocks dropping, but will replace stocks that you owned, but the broker stole from you. (overgeneralization). There's a $500K limit, with $250K max in cash.
Yes, the entire financial system is based on trust. As we have seen repeatedly, even the ratings agencies can be wrong and in collusion.
You need to understand what products have any insurance/contingency/recourse if things don't go as planned. A lot of people were surprised when they found out SIPC didn't ensure futures when MF Global declared bankruptcy last fall.
