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The downside of bankruptcy-proofing your investments is that it’s kind of a pain.

So there’s quite possibly some aggravation ahead for a reader who wondered about the risk of loss in his investing account if his online broker goes under.

“I have a seven-figure account,” he wrote. “What would I lose if the broker went bankrupt or became insolvent?”

It’s conceivable that assets in client accounts could be lost if a broker became insolvent. To ease concerns about this, the Canadian Investor Protection Fund was created. It’s basic for online brokers to be a member of CIPF, which covers holdings in an eligible account to a maximum of $1-million if a firm becomes insolvent. Some brokers may offer additional insurance to protect clients in case of insolvency, but that’s not typical.

Investors who hold more than $1-million in assets in a single account have to decide whether they’re worried enough about the risk of insolvency to go to the bother of opening a second account elsewhere to stay within CIPF limits. Over the years, I’ve heard from many readers who maintain accounts at two or three online brokers. But anyone who values convenience will want to watch over just one account.

My suggestion: Stay within the CIPF limits in all accounts and remove broker insolvency from your list of financial things to worry about. Brokers very rarely go under, and they tend to be fringe players when they do. But one of the lessons of the global financial crisis is that rot can set in at all levels of the financial world.

Investors who hold a lot of money in guaranteed investment certificates face similar questions about keeping money safe in case a financial firm goes bankrupt. Canada Deposit Insurance Corp. covers eligible accounts at member institutions for up to $100,000 in principal and interest. If you’re conservative enough to use GICs extensively, it makes good sense to keep within CDIC limits at any one bank.

To be clear on CIPF, it does not cover investors against declines in the value of their holdings, against fraud or bad advice. Its mission is to cover cash and securities that disappear from your account after your firm goes under.

-- Rob Carrick

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