Is Interactive Brokers Safe? (Assets in Street Name, Poor Support, and Compliance Concerns)
Is Interactive Brokers safe? I have been a customer at Interactive Brokers (IB) for the last 11 years and on and off for many years before that. I love IB as a broker, but my capital is at risk:
Your assets in IB are not segregated but held in “street name” and thus you are liable to losses if IB defaults or goes bankrupt.
But perhaps worse than being held in “street name” is Interactive Brokers’ weak, automated, and poor back-office practices. The “support” is such a weak part of their operation that it might be time to move some assets out of IB to mitigate risk. Why? Their compliance department seems painfully slow and disorganized. Things that should take days, take months – many months, actually.
My recent experience with them is a reason for concern, not to mention the business model itself. Not only are your assets at risk if Interactive Brokers face bankruptcy, but your assets are additionally at risk of being “frozen” for a substantial amount of time because of automation and weak support.
First, let’s explain what it means when assets are held in “street name”:
What happens if Interactive Brokers goes bankrupt?
Your assets at Interactive Brokers are held “in street name”.
What does “in street name” mean? It means your assets are not held in your name. If you own shares in Apple, your name doesn’t show up in the registry, but Interactive Brokers does. That means Interactive Broker is the official owner, while you are the beneficial owner of the rights. Interactive Brokers are the official owner on behalf of you.
Why on earth do they keep shares “in street name” when, for example, Scandinavian brokers register shares on the true beneficiary?
IB claims it’s to lower trading costs. The argument is to facilitate a quick and cheap change of ownership. Mind you, IB’s business model is no different from other US brokers, it’s the same whatever broker you’re using. To get more trading, IB charges a 10 USD inactivity fee (edit: removed in Q4 2021).
However, most brokers, do offer direct ownership if you ask for it. IB doesn’t. I know several traders and investors have asked to pay more in commissions or custody fees in order to get their assets separated from IB’s business operations, but to no avail.
The implications are clear: if IB goes bankrupt you get distributed what is left of the assets in IB. Your assets are a liability in the balance sheet of IB.
A safety valve is a guarantee from the regulator: 500 000 USD in the US, 20 000 EUR in Ireland, and 100 000 EUR in Hungary. In other words, your money is at risk. The good thing is that IB has implemented higher margins than most brokers to mitigate risk and black swan events. IB has additionally several billion USD more of equity than required by the regulators.
IB has a good track record and the main owner, Thomas Peterffy, has skin in the game. Personally, I’m not afraid of my assets, as IB is well capitalized.
Now enter a new form of risk: lack of support and compliance risk:
Compliance mess at Interactive Brokers
I guess most traders and investors have experienced the hassle and wasted time spent on anti-money laundering measures. I went through this hassle with IB in 2020:
Documenting source of wealth (SOW) at Interactive Brokers:
I opened my current account in 2011. Over the years, I have opened several accounts to separate the strategies and time frames/strategies, but during 2020 I had two accounts: one with a negligible 2000 USD, and one with a significant amount.
It was smooth sailing until July 2020, when suddenly they asked for detailed documentation of how I obtained my source of wealth (SOW). To ask for SOW is part of the Know Your Customer (KYC) procedure. This is standard practice in all financial institutions because lawmakers have decided that everyone is guilty of laundering money until you prove your innocence.
I was asked to fill out this form which all new accounts need to sign, I believe. This was my first compliance question from IB – ever. If you read carefully, you’ll notice the form is pretty ambiguous and poorly formulated.
Put short, IB wants you to provide documentation of the sources of ALL your assets, not only what you have deposited at IB. (I suspect it doesn’t help to have a residency in a country with a history of laundering money.)
Long story short, after several e-mail exchanges and three months of account review they accepted my SOW in late October 2020. many e-mails and several misunderstandings along the way. IB takes weeks to answer, and gives you just a few days to answer, even though they require bank statements or other proof decades back (in my case I needed to go back to 2003). This is, of course, problematic because most banks keep statements max for ten years.
On a sidenote: in one of the e-mails I sent to IB during the account review, I was required to provide info on my name change. Mind you, I have not changed my name – ever – and I had no idea what kind of name change they referred to. Only guessing, I assume they don’t know the difference between my last name “Grøtte” and my English version which is “Groette”. All this is provided in my passport and should be basic stuff for any knowledgeable compliance department. To clear up the name mess I replied to one already existing open support ticket, but to this day is still unanswered. I assume they were happy with my answer (but who knows).
IB migrates EU customer out of the UK: Brexit mess
The FCA has regulated EU residents at IB in the UK, but Brexit means IB no longer can serve customers residing in the EU from the UK. In December 2020, all EU residents at IB received an e-mail about the issues with Brexit. IB has apparently set up three new entities in Ireland, Luxemburg (edit: shut down per 4Q 2021), and Hungary to keep on serving their EU residents. I’m an EU resident. Unfortunately, I would say, so this mess applies to me.
I had the option of staying at IB-UK, which means my accounts could only close positions, not open new positions, or agree to transfer to Hungary/Central Europe. I tried several times to contact support to ask if I could be transferred elsewhere, but gave up after waiting for hours on the phone. The thought of being regulated by a Hungarian entity is not very tempting. As recently as 2010 Hungary nationalized its private pension system.
Long story short, I agreed to transfer to Hungary. I read through the provided documentation. One of the details was that I agreed to transfer all the KYC documentation collected