As a new year begins, we all tend to reevaluate our lives. That should be true of our trading lives, too.
That's no fun, right? I'm going to tell you up front that acting on this article's suggestions isn't going to be any more fun than a resolution to go to the gym more often or stick to a monthly budget.
As the new year begins, it's time to review our brokerages' guarantees for the safety of our money. With 2008's challenges and Madoff's harm in our not-too-distant past, we all feel that trickle of dread when confronting the topic of safety and money. Our shoulder muscles might stiffen at the mere suggestion that we investigate the protections we're offered against a large loss due to bankruptcy or fraud.
It's perhaps comforting to learn of the FDIC's assertion that since the inception of the FDIC, no depositor has ever lost a penny of FDIC-insured deposits. A caveat that is appended to that statement. Not all deposits are covered, either because the category of fund or security is excluded or because the total is over the individual or joint limit for coverage.
For example, savings would constitute a covered category at a FDIC-insured institution, but neither stocks nor mutual funds would be a covered category. Coverage limits kick in at varying amounts, according to the type of account and whether it is held by an individual or as a joint account. For example, according to the FDIC site, a savings account owned by a single person without named beneficiaries is covered up $250,000 if the single person has no other accounts at the same institution. This page from the FDIC website offers two PDF brochures, Deposit Insurance at a Glance and Your Insured Deposits for download. Perhaps you'd rather collect the information by watching one of the short videos on this page found on the FDIC site.
Some readers may have deposits in individual accounts totaling over $250,000 at the same institution or joint accounts totaling $500,000 at a single institution. In some cases, your account may also be SIPC insured up to a higher amount. By all means, check those SIPC-covered limits, but we have to perform our due diligence and look beyond the numbers themselves. Be aware that funds covered by FDIC are insured against all types of losses, but those covered by SIPC are insured only against broker/dealer insolvency. If your brokerage should engage in fraudulent activity that results in a loss, your loss is not covered by that insurance, although there might be other legal remedies.
There's another reason those counting on SIPC insurance should look beyond the limit amounts. SIPC states that it protects against the "loss of cash and securities--such as stocks and bonds" up to $500,000, but there a limit of $250,000 on the cash portion. The SIPC offers a succinct and easy-to-understand page on the protections offered by SIPC insurance.
When studying what coverage you might have, it's important to look into your brokerage's sweep policy. Are your unused funds swept overnight into other funds such as money market funds? Is there the unlikely possibility that you might have carefully allocated funds so that no one institution has more than the FDIC-covered amounts only to find that your funds are regularly being swept into an institution linked to the ones where you already have large deposits? Be sure to check your brokerage's sweep program. Here's an example from TD Ameritrade setting out the details of their cash sweep program, including the institutions to which the cash is swept and the coverages offered for those swept funds. Notice that under "Money Market Funds," TD Ameritrade warns that such funds "are not insured or guaranteed by the FDIC, any other government agency, or TD Ameritrade," but other types of sweep vehicles were insured.
Of course, neither the FDIC nor the SIPC is going to protect against loss in case of a market reversal. Wouldn't we all be better off if they did?
The bottom line? If you're not familiar with your financial institution or brokerage's coverage, how the FDIC and SIPC coverages work, or your brokerages sweep programs, devote an hour to reading the links on this page.
This was a boring topic, but a necessary one for us to address. At least I kept it as short as possible! I must add the admonition, however, that I'm not an expert on the protections offered by FDIC, SIPC or other entities, but rather just another brokerage client out there doing my own due diligence. This article suggests places you might start, but verify this information for yourself before you trust it. Parameters can change quickly, particularly in brokerage sweep accounts, so make sure you're looking at the most up-to-date information, too. You'll find cached articles on the internet before FDIC limits were raised a few years ago, for example.