Dear Linda, I remember being told that I shouldn't keep more than $250,000 at one bank since that is the FDIC insurance limit. What about my money at a brokerage institution, such as Schwab, Vanguard, or Fidelity? Should I spread my money out across brokerage firms as well?
Dear Curious Carl,
Protecting your money in the bank versus your money in a brokerage firm requires two separate approaches. Let me explain the process for both.
How to protect your money in the bank: This includes your checking, savings, money market deposit accounts (MMDAs) and certificates of deposits (CDs).
1) Confirm these accounts are being held at an FDIC-insured bank.
The Federal Deposit Insurance Corporation (FDIC) is an independent US Government agency that protects your deposit accounts if the insured bank fails. Your coverage is automatic as long as your bank is insured by the FDIC.
2) Confirm you are within the coverage limits.
Each "category" of account is covered for the principal plus interest up to $250,000, per bank. For example, if you have an Individual account and a Trust account, they will each be covered for up to $250,000. View the list of categories here or use the FDIC's tool, EDIE. EDIE allows you to enter your bank's name, account categories, and balances to identify any gaps you have in coverage.
There were 8 banks that failed in 2017. If it happens to your bank, the FDIC typically pays out the insurance within a few days of the bank closing. You will either be reimbursed with a check or your funds will be moved to a new account at another FDIC-insured bank. As the bank gets liquidated, there may be additional available assets that can be distributed pro-rata to those with accounts in excess of the FDIC insurance limits. These payments, though, are not guaranteed and can take several years to be fully distributed.
How to protect your money in a brokerage firm: This includes cash and securities, such as stocks, bonds, Treasury securities, certificates of deposit, mutual funds, and money market mutual funds.
1) Confirm this money is being held at a registered brokerage firm that is regulated by the SEC and under the supervision of FINRA.
Registered brokerage firms are required to keep customer assets segregated from the firms' assets. Therefore, even if the brokerage firm fails, customers' assets are safe. Periodic examinations are conducted to ensure the registered firms are financially sound and that their annual filings are accurate. They are also required to maintain a minimum level of reserves and be a member of the Securities Investor Protection Corporation, which offers SIPC insurance.
2) Confirm you are within the coverage limits.
SIPC insurance is invoked if a brokerage firm shuts down and assets are missing due to theft, fraud or unauthorized trading. Notably, this is not protection against market loss, being sold worthless securities, or bad advice from a broker. Also, SIPC insurance, just like FDIC insurance, does not come into play unless the brokerage firm is already shutting down and in liquidation mode.
SIPC protection is further limited to $500,000, which includes $250,000 in cash, per account "capacity", per firm. Examples of separate account capacities include an individual account, joint account, IRA, and Roth IRA. A comprehensive list of all capacities can be found here.
Because brokerage firms are required to keep customer assets separate, you do not need to spread out your money across multiple brokerage firms as you do with banks. If your brokerage firm fails, your accounts would remain intact and be transferred to another SIPC-insured firm.
Other steps to protect your money:
There is a much greater likelihood that you will encounter other types of fraud with your money. For example, we had a client with an old savings account at a bank. She decided to close the account and consolidate it with her other assets in an effort to simplify her financial life. Upon arriving at the bank, she learned that someone else closed the account fraudulently and took the money. Our client was referred to the bank's fraud department, which originally denied her claim. They stated that she did not check her account frequently enough and should have noticed the missing money. While they eventually approved her claim and restored her account, it was a very stressful event for the client.
To protect yourself against this and other types of fraud, review your bank and brokerage firm's fraud policy or pledge. For example, here is Vanguard's policy, which includes things such as reviewing your accounts on a regular basis and protecting your computer. For additional tips, check out PWR's 3 Steps to Keeping your Accounts Safe.
Sources: https://www.fdic.gov/deposit/deposits/faq.html https://www.sipc.org/for-investors/what-sipc-protects https://www.sipc.org/for-investors/investor-faqs/ http://www.finra.org/investors/alerts/if-brokerage-firm-closes-its-doors
"Ask Linda" is a monthly personal finance column where the founder of Planning Within Reach, LLC, Linda Rogers, picks one question from her readers and publishes a detailed answer with the hope that it may benefit others. If you would like to ask Linda a question, email linda@planningwithinreach. Due to the volume of questions received, she may not be able to answer every question in a timely manner. For advice on your personal situation, schedule an initial call to learn about our services.