Broker Check

How Safe is Your Money (Part II)

September 13, 2021

We all assume that when we deposit our money with a financial institution, whether that be a bank or a investment custodian, that our money is "safe". Generally, that assumption will hold true and you'll be able to sleep soundly at night not worrying about your money or assets suddenly going "poof"! But how safe is your money really? Do you know what protections you may have to something going wrong? In this piece, I'd like to explore some of the questions and concerns that typically arise, especially when markets and the economy go through periods of turmoil.

You've probably heard of the Federal Deposit Insurance Corporation, or FDIC. This company, which is backed by "the full faith and credit" of the U.S. government, insures the money deposited at banks, up to a maximum of $250,000 per legal account registration at the bank. So if you have a trust account and a retirement account and a joint-account and then an individual account, each of these accounts would be protected, to up to $250,000, from failure of the bank. Note, that if you have 2 retirement accounts at a bank, such as an IRA and a 401K, these would be added together and the two accounts would, combined, be eligible for up to $250,000 of coverage. Also, note the FDIC insures only cash held, and does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank.

For securities, there is another organization called the Securities Investor Protection Corporation, or SIPC. SIPC protects against the loss of cash and securities such as stocks and bonds – held by a customer at a SIPC-member brokerage firm or custodian. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash, per account registration type (in much the same way that FIDC coverage pertains to separate account types). An example of different accounts types that would each have $500,000 of SIPC protections at the same brokerage form or custodian would be: an individual account; a joint account; a Traditional IRA; a Roth IRA; an UTMA account for a minor.  It's important to note that SIPC coverage only covers you for the loss of cash and securities due to the insolvency of the brokerage firm or custodian. SIPC does not protect against losses from the decline in value of your securities.

These are your basic cash and securities protection if you hold accounts at a financial institution in the U.S., whether you are a citizen or non-citizen. Additionally, some companies may offer supplemental coverage in addition to SIPC and FDIC. For example, the custodian we use for many of our client accounts, Axos Clearing LLC, supplements SIPC coverage and insures clients accounts up to $100 million (a maximum of $1.15 million which can be cash) through a private policy with Lloyd's of London.

The bottom line? While only you and your financial advisor can work to avoid losses stemming from poor investment decisions, there are several organizations and arrangements that exist to help prevent you from suffering losses from your bank or financial institution going belly up!