San Francisco Chronicle - (Sunday)
How much to keep in brokerage account
Today’s column is inspired by a reader who wants to know whether he should split his assets among several brokerage firms to stay below the $500,000 limit set by the Securities Investor Protection Corp.
“I am told that investments in financial houses such as Fidelity, Vanguard, etc. are insured up to $500,000. These days it is easy to exceed the amount especially in retirement vehicles,” wrote Jerry Fisher of Menlo Park. “When I inquire about the safety of balances in excess of these amounts, I always receive
the same answer, which is ‘not to worry.’ Fidelity and Vanguard, for example, each said that they purchase additional insurance to cover any contingency. Fidelity said its purchase figure is $1 billion. Is there actually nothing to worry about? Should we limit our investments to less than $500,000 per firm?”
First and foremost: Unlike bank accounts insured by the Federal Deposit Insurance Corp., accounts at brokerage firms are not federally insured. Most brokerage firms are members of the Securities Investor Protection Corp., which was set up by a federal statute but is not a government agency nor backed by one. Nor is it an insurance company.
SIPC steps in when a member firm is shut down and cash or securities (such as stocks, bond and mutual funds) are missing from customer accounts. If it can’t recover the assets, it will replace up to $500,000 worth of missing securities and cash, which includes a limit of $250,000 on cash. Money market funds and Treasury securities, often described as cash, are treated as securities.
You can, however, get more than $500,000 worth of SIPC protection at the same brokerage firm by having different categories of accounts there. For example, an individual account, joint account, individual retirement account and Roth IRA each gets up to $500,000 worth of protection.
SIPC does not protect investors from losses due to market fluctuations or bad investment advice. If you buy stock in a company that collapses because of fraud, like Enron did, you get nothing. It also does not cover most commodity futures contracts, foreign exchange, fixed annuities and unregistered limited partnerships. It does not cover mutual funds held outside a brokerage account.
If someone hacks into your account but the firm is not being liquidated, “then SIPC has no role,” said its CEO, Stephen Harbeck.
It covers 401(k) accounts “as long as the individual is getting statements and has a direct relationship with the brokerage firm,” Harbeck said.
Many brokerage firms purchase insurance that would cover certain customer claims that exceed SIPC limits. There is usually a limit per customer, and an aggregate for the company, for this excess insurance.
Charles Schwab says it has coverage with Lloyd’s of London and other London insurers that, combined with SIPC coverage, “provides protection of securities and cash up to an aggregate of $600 million and is limited to a combined return to any customer from a (bankruptcy) Trustee, SIPC, and London insurers of $150 million, including cash of up to $1,150,000.”
Vanguard says its brokerage arm has coverage from Lloyd’s and other London Co. insurers “with an aggregate limit of $250 million, incorporating a customer limit of $49.5 million for securities and $1.75 million for cash.”
Fidelity says it provides excess SIPC protection with no limit except for a $1.9 million cap on cash. There is a $1 billion aggregate limit for all of Fidelity’s retail brokerage accounts combined, a spokesman said.
Separate from regular or excess SIPC protection, Fidelity says it will “reimburse you for losses from unauthorized activity in covered accounts occurring through no fault of your own.” If you give your log-in credentials to an adult child, estranged spouse or any third party including a financial-account aggregator and lose money as a result, you’re out of luck.
SIPC has about $3 billion available to pay claims. It also can borrow up to $1.5 billion from the U.S. Treasury, but has never accessed this credit line, Harbeck said.
In terms of customer losses, the biggest failure of a member firm was Bernard L. Madoff Investment Securities. Madoff victims with net losses up to roughly $1.3 million were made whole, Harbeck said, thanks to SIPC coverage, recoveries from the firm and from customers who took out more than they put into the Ponzi scheme. Those with larger losses got back 64 cents on the dollar, Harbeck said, although that is expected to increase to 74 cents on the dollar.
Dan Wiener, who publishes an independent newsletter for Vanguard investors, said it is safe to keep more than $500,000 in an account type at Fidelity or Vanguard. “There is a big difference between owning stocks, bonds and mutual funds through a brokerage account at Vanguard and having a deposit of cash at a bank. Vanguard is taking money under your direction and putting it in stocks and bonds. The bank is taking your money and, with no direction from you, lending it out to all manner of borrowers,” he said.
“If Vanguard were to disappear, presumably you would have a record” of what you owned and would retain ownership of those securities, he said. “It would be complicated as hell (to get them back), but the money doesn’t disappear.” Wiener said he would rather exceed the SIPC limit at Vanguard than exceed the FDIC limit at one bank ($250,000 per person for each account type). Mark Molumphy, an attorney with Cotchett, Pitre & McCarthy, disagrees. “Given the fluidity of today’s economy, I think people would be nuts to keep more than $500,000 in any single brokerage account. This comes from personal experience representing people in the Madoff (and other) cases. There is no such thing as a sure thing. A company that used to be a bulwark of Wall Street goes away in a matter of days. I’ve seen it time and again. It makes me skeptical,” he said.
“The safer alternative,” he said, is to keep up to $500,000 in different account types at one brokerage firm or set up a separate account at another firm.