FDIC, SIPC and the safety of your money

Not surprisingly, with the endless news coverage of the failure of IndyMac Bank (sensationalism at its finest!), a question on everyone's mind is, "just how safe is my money?"  Let's face it, the last thing any of us want is to find ourselves standing in line for hours outside our bank or brokerage office hoping to get our money back.  For our clients, and any other interested parties, we wanted to address the issue of safety of funds.

The majority of our clients' assets are custodied at Charles Schwab & Co., so most of this will address the safety of assets at Schwab.  Some of our clients' assets are custodied at TD Ameritrade, and the protections that they offer are effectively the same.

Principle among concerns that clients have expressed to our office are:

1. I have more than $100,000 at a bank, should I go take some of it out?
2. How safe is the money market (cash) portion of my brokerage account in the event of a Schwab bankruptcy?
3. How safe are the investments (mutual funds, stocks, bonds, CDs, etc.) in my account if there was trouble at Schwab?
4. How safe are the underlying investments, not in terms of investment loss, but loss due to insolvency by the investment manager (DFA, MLM, Payden Funds, etc.)?

Many of you are familiar with the Federal Depository Insurance Corporation, or FDIC.  The FDIC is an independent agency of the Federal Government, which was created in 1933 in the aftermath of the bank failures that led to the Great Depression.  The FDIC insures deposits up to $100,000 (and possibly more) for member firms.

Brokerage accounts, such as those at Schwab or TD Ameritrade, are covered by the Serurities Investor Protection Corporation (SIPC), which is similar to the FDIC, but for brokerage firms.  There are material differences, however.  For example, the SIPC does not cover fraud or investment losses.  Also, the SIPC is not an agency of the Federal Government, rather it is a non-profit corporation funded by its members.  The SIPC was created in 1970 by an act of Congress.

Let me address the earlier questions:

FDIC Insurance

An easy rule of thumb to keep in mind is that FDIC does not provide additional coverage per account, rather the insurance is per depositor.  There are myriad ways to increase your FDIC insurance above $100,000 at any one bank.  For example, an account held jointly by a married couple is provided $200,000 ($100,000 per depositor).  Thus, if you individually have $80,000 in a CD, $30,000 in a savings account, and $10,000 in a checking account all at one bank, you are uninsured for $20,000.

Our Advice is simple.  Don't leave more than $100,000 at one bank.  There are far more banks in your area to choose from.  A quick drive down Hawthorne Boulevard in Torrance confirms this.  If there is a reason that you must leave more than $100,000 at one bank, check with the FDIC to see how you can increase insurance coverage.  Visit the FDIC Web Site, or call them:

Call toll-free at:
1-877-ASK-FDIC (1-877-275-3342)
from 8 am until 8 pm (Eastern Time)
Monday through Friday

Hearing Impaired Line:
1-800-925-4618

Money Market (cash) Balances in your Brokerage Account

In the event of failure of Charles Scwhab or TD Ameritrade, your money market (cash equivalent) balances are covered up to $100,000 by the SIPC.  Schwab and TD Ameritrade have both purchased additional insurance through Lloyd's of London (the 300 year old reinsurance market) to cover investors for up to $1,000,000 in cash equivalent balances.

Investments held in your brokerage account

The way to remember this is that the actual investments are not owned or controlled by Scwhab, and as such are not dependent on the financial solvency of Schwab.  If Scwhab fails, you still own DFA or Payden Funds, market traded closed end funds (such as those purchased by YieldQuest), and individual bonds.  Schwab is simply the custodian of those assets, holding them on your behalf "in street name."  If Schwab failed, you would have the option of carrying those assets in cerificate form (not what we would recommend), or moving them to another broker.  In this unlikely event, we would offer guidance on the movement of assets. 

Losses due to brokerage firm insolvency are covered up to $500,000 by the SIPC, and up to $150 million through the Lloyd's of London additional insurance.

Safety of underlying investments

In what amounts to another level of protection, your assets are ultimately invested not in the success or failure of DFA, but in the thousands of companies that your funds are invested in.  If DFA fails, the most likely scenario is that the mutual funds would be merged into another existing or new mutual fund.  Alternatively, the holdings (again, thousands of stocks) would be liquidated and investors would be given cash from the proceeds.  There are few examples of this that we can draw upon, as most of the investment company failures are a result of massive losses in the funds and outflows of money.

With respect to mutual funds, the concern of failure of a mutual fund company was best addressed in a 2004 Money Magazine article, in the midst of the mutual fund scandals: 

Under the Investment Company Act of 1940, which governs the industry, each fund is set up as an individual corporate entity, with its own board of directors. Essentially, your fund hires the fund company to manage its assets. If the company were to file for bankruptcy, its creditors would not be able to touch the fund's assets. And the fund's directors could immediately hire a new manager, pending shareholder approval.

The bottom line for us is that we feel extremely confident in the safety provided by Schwab, TD Ameritrade, the SIPC, FDIC, Lloyd's of London, and the multiple layers of protection structure of your investments.

Please do not hesitate to contact our office if you have any questions on this very important matter.  We want to be sure that we are not missing any angles to this issue.  If so, we would be happy to address it individually, and if appropriate in another general write up for all of our clients.

Comments

[Jeff Paul Internet Millions]

Thanks for posting such vital information. I am new to the blogging scene. Any and all pointers are helpful.

[Jeff Paul Scam]

I compeletely agree with global challenges the security is a question , different security measures are important to ensure privacy .

[jeff paul forum]

Today security is at risk , with economic crisis individuals go for other measures to earn through wrong means .