When I buy and sell stocks, I do it through a brokerage, so the stocks aren’t owned by me directly. This creates a single point of failure for me if the brokerage goes under for some reason. I can’t imagine with billions of dollars you would tolerate that kind of single failure point, so how do these guys do it?
In: Economics
Just because a brokerage goes bust, doesn’t mean you lose your stock ownership in a company. This is where regulators are important, and would step in and facilitate the change of that ownership over to another brokerage.
I won’t speak to how guys like Warren Buffett do it, but guessing he has his money spread across many different brokerages and different private funds. When you get to the next level of wealth, much of your money isn’t directly in brokerages but rather different privately managed funds and investments.
Well, there are two levels of this.
The first is Berkshire Hathaway Inc. This publicly traded multinational conglomerate holding company is arguably “run” by Buffett. In actuality there are layers of managers who issue the trading orders to the actual workers, but this company trades on many exchanges.
The second is Warren Buffett’s personal money. Much of this is in BH, of course, but it’s likely distributed across a number of firms and accounts, for single point of failure reasons like you mention. There are also a lot of complex tax issues going on, and an army of accountant and lawyer employees making sure that’s done correctly. This might be run as a family office (a special sort of hedge fund like trading operation) but a quick Google doesn’t find a anything on this family office.
You have a fundamental misunderstanding. When you buy and sell stocks, you own and sell the stocks, whether you’re doing it yourself directly or a brokerage is doing it for you. The brokerage going under would be functionally equivalent to if you decided to use a different broker; you’re just being forced in the former scenario.
You DO directly own the stocks. Laws ensure that. This is one of the MANY areas of our lives where our government regulations protect the end consumer. It may not be completely seamless if your brokerage goes under, but those ARE your shares of ownership.
For what it’s worth, even you don’t really have a single point of failure. If your brokerage becomes insolvent, and, for whatever reason, the assets under its management are not just sold to another brokerage (which is possible, albeit ridiculously unlikely with any reputable broker, if client assets were mistakenly mixed with brokerage assets and used to pay off debts), it probably has SIPC insurance for up to $500k per account of lost assets. That would cover most retail investors. Obviously for a multimillionaire, that could still be financially devastating.
The very wealthy may benefit from using multiple brokerages to maximize SIPC coverage. However, in a lot of cases, they give their money to privately managed funds like hedge funds that would have their own way of placing orders. I’m pretty sure they generally have their own family offices that’s basically a team to manage all of their financial affairs and that family office, if it is going to invest or is holding stock outside of a professional fund, does just use a brokerage. They can mitigate risk by using several and/or using very large ones; IBKR is probably not just going to lose a few billion dollars of your money when they have hundreds of billions under management.
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