Elean
Hi everyone! Thank you for tuning into the podcast. I’m Elean Mendoza and I’m here with Evan Shorten, the firm’s founder and principal.

Evan
Hello everyone. I hope you’re all doing well. I know many of you are interested in this topic so I’ll keep it brief before we get started. If you haven’t done so already, please subscribe to the podcast either on the Apple Podcasts App, Stitcher Radio, or by subscribing to our YouTube channel.

Elean
Ok, so this episode is in response to a lot of questions we received over the last few weeks due to the bank failures that have occurred over the last couple of months. Essentially, many of our clients and individuals we work with want to know, is their money safe at Schwab? Referring to the brokerage Charles Schwab & Co. The answer is, “yes, pretty much,” but Evan is going to go deeper and explain how brokers safeguard your assets better than the banking industry.

Evan
Let’s look at this from two different scenarios. First, let’s talk about the more obvious or common fear that people have and that’s their assets disappearing because the financial institution they use goes bust. In this scenario the FDIC, or the Federal Deposit Insurance Corporation, will insure your deposits up to $250,000 per person per ownership category. An example of an ownership category are individual accounts, another example would be joint accounts, and a third example could be retirement accounts. If your deposits are spread across multiple ownership categories then the FDIC could insure more than $250,000

Brokerage firms have what’s called SIPC, or the Securities Investor Protection Corporation, which insures up to $500,000 per person per separate capacity. In SIPC terms, a separate capacity has the same meaning as ownership category; individual accounts, joint account, retirement accounts, etc. However, at the end of the day, SIPC insurance doesn’t really do anything in the event your brokerage were to fail, and I mean that as a good thing. Let me explain why.

In a bank, the reason deposit insurance is so important is because banks take your deposits and put those funds on their books. Your deposit actually becomes an asset of the bank, meaning your money now legally belongs to the bank, and the bank issues you an IOU for the amount. If the bank fails, it counts your money as part of its assets. Depositor insurance guarantees you’ll be able to reclaim some of your money within the allocated insured limit, but at the end of the day, “if you’re money is in the bank, it’s not really your money anymore.”

Brokerages operate completely differently. When you deposit stocks, bonds, or other securities into your brokerage account, those securities are never considered assets of the broker. In fact, your securities are held separately and never stop being your property. So in the event your broker would fail or go out of business, you always have the freedom to take your assets and walk away.

Elean
So to clarify, what if you have more than $500,000 in an account at your broker?

Evan
You’re free to take all of your securities with you, whether it’s $500,000, $1MM, or $20MM. Unlike a bank, the broker never puts your assets on their books and therefore can’t withhold them from you.

Elean
Ok, so then what’s the purpose of SIPC and the $500,000 insurance limit? Is that just make you feel good marketing?

Evan
Earlier I said we would look at the concept of deposit insurance through two different scenarios. While SIPC insurance isn’t all that relevant in the event your broker goes bust, it is highly relevant in the event of fraud. SIPC’s true purpose is really to protect you from a rogue broker or investment firm. In a scenario where a broker has defrauded its clients, SIPC insures up to $500,000 per person per separate capacity. If you recall my earlier comments, it’s easy to ensure more than $500,000 if your assets are spread out over different account types. For example, an individual account, a joint account, an IRA, and so on.

Additionally, the largest brokers like Schwab and Fidelity carry what’s called excess SIPC insurance protection. That’s additional insurance on top of the $500,000 per account type that SIPC provides. This excess insurance pays out claims in the event that normal SIPC insurance amounts are maxed out by a client. Charles Schwab specifically carries an aggregate excess SIPC coverage of $600 million. This additional type of insurance is only provided by brokers and not banks.

Elean
Real quick Evan. You used the term “aggregate excess.” What does that mean?

Evan
Aggregate excess SIPC coverage is additional insurance coverage for the broker as a whole. In other words, a brokerage firm like Charles Schwab carries enough aggregate excess SIPC coverage to cover an additional $600 million of total claims beyond the standard SIPC insurance. It does not mean, and I repeat, it does not mean each person is covered for an additional $600 million.

Elean
Since SIPC really only comes into play in the event of fraud committed by your broker, can we trust brokers? How often do brokers defraud clients?

Evan
Well brokers are for the most part are very trustworthy. Large brokers like Schwab, Fidelity, Vanguard, Merill Lynch, JP Morgan, and so on are heavily regulated; keep detailed paper trails of all the assets they custody for clients; and carry excess SIPIC insurance. To this day, if you visit the SIPC website and look for cases and claims, you’ll find that Bernie Madoff Investments is the only open case.  

Elean
In other words, you don’t have to worry too much about the investments you keep at large, reputable, name-brand brokers. The big takeaway here is that brokerage firms generally do a better job at safeguarding your assets over a traditional bank.

Hopefully you found this episode of the Paragon Podcast informative. We ask that you please subscribe to the podcast so you can stay up to date when we discuss new topics, market news, or things that affect your wealth.

Thank you for listening and we’ll see you here next time.