Does anyone consider institutional risk?

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LMK5
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Does anyone consider institutional risk?

Post by LMK5 » Fri Oct 12, 2018 11:23 am

Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration? We all know that Vanguard and other mutual fund firms are not covered by any SIPC or other insurance, so, are there real risks to customers assets such as fraud, bankruptcy, or other non-market risks that investors should be wary of?

Also, if I move my assets from Vanguard to Vanguard brokerage, does that mean that all my assets, including Vanguard mutual funds, are then covered by SIPC and whatever other brokerage insurance they carry? If so, does that make the move worthwhile?

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vineviz
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Re: Does anyone consider institutional risk?

Post by vineviz » Fri Oct 12, 2018 11:28 am

LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration?
People do all sorts of irrational things, and I'm sure (based on comments I've read before) that some people here do this irrational thing.

Mutual funds and brokerage accounts are among the most heavily regulated and scrutinized businesses in America. If there is such a thing as "institutional risk" in this context, I'm not sure how you'd begin to measure it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

delamer
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Re: Does anyone consider institutional risk?

Post by delamer » Fri Oct 12, 2018 11:36 am

We keep assets in a couple different places because of concerns about identify theft or one institution’s online system being hacked.

But not due to conerns about the type of risk that you are talking about.

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Re: Does anyone consider institutional risk?

Post by LMK5 » Fri Oct 12, 2018 11:53 am

delamer wrote:
Fri Oct 12, 2018 11:36 am
We keep assets in a couple different places because of concerns about identify theft or one institution’s online system being hacked.

But not due to conerns about the type of risk that you are talking about.
That's certainly a good reason for institutional diversification.

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vineviz
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Re: Does anyone consider institutional risk?

Post by vineviz » Fri Oct 12, 2018 11:57 am

delamer wrote:
Fri Oct 12, 2018 11:36 am
We keep assets in a couple different places because of concerns about identify theft or one institution’s online system being hacked.
Doesn't this double or triple the chances that you'll have assets at an institution which gets hacked?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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JoMoney
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Re: Does anyone consider institutional risk?

Post by JoMoney » Fri Oct 12, 2018 12:17 pm

I wouldn't put any money into a no-name no-reputation broker, especially not without doing extensive checks to ensure SIPC in good standing etc...
So in that sense I do 'consider' the risk of the institution.
I also keep some money in physical cash, in a FDIC bank, and in US Savings Bonds, and I consider that as an emergency fund if there was some temporary short-term freeze at my primary institution, which I don't have any specific concerns about.
Other than that, I have no problems keeping the bulk of may assets at one of the majors Vanguard, Fidelity, Schwab, ... their are others that I think are likely ok, but I don't trust them to not pull a fast one with higher fees and transaction costs, even though I think the assets are as safe as can be.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Does anyone consider institutional risk?

Post by delamer » Fri Oct 12, 2018 12:34 pm

vineviz wrote:
Fri Oct 12, 2018 11:57 am
delamer wrote:
Fri Oct 12, 2018 11:36 am
We keep assets in a couple different places because of concerns about identify theft or one institution’s online system being hacked.
Doesn't this double or triple the chances that you'll have assets at an institution which gets hacked?
If Fidelity’s online system is compromised, then we have money at Vanguard that we can still access.

That’s the benefit.

If we had everything at Fidelity, then we have no access to our funds.

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Re: Does anyone consider institutional risk?

Post by edgeagg » Fri Oct 12, 2018 12:44 pm

OK. So how many times have VG and Fido been hacked and customer accounts compromised over the last 10 years? None that I am aware of.

The more likely situation is non-responsiveness of the VG and Fido sites under heavy trading conditions. This has happened several times - and I've had equivalently poor performance at both VG and Fido. So I'm not sure that I've actually reduced any risk since their systems are both affected by the same common cause, namely high trading volumes. Hopefully VG puts some of that $5.1 trillion into better IT.

OTOH splitting investments across multiple brokers makes it harder for me to get a unified portfolio view without installing yet another third party aggregator app that immediately acts as another source of security vulnerability and credential leakage.
ea

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Re: Does anyone consider institutional risk?

Post by Ron Scott » Sat Oct 13, 2018 11:19 am

vineviz wrote:
Fri Oct 12, 2018 11:28 am
LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration?
People do all sorts of irrational things, and I'm sure (based on comments I've read before) that some people here do this irrational thing.
edgeagg wrote:
Fri Oct 12, 2018 12:44 pm
OK. So how many times have VG and Fido been hacked and customer accounts compromised over the last 10 years? None that I am aware of.

It is interesting to see how people make decisions about avoiding losses with small, or unknown probabilities of occurrence.

We all have the ability to separate our funds, at very little expense to us, into 2 or more institutions. Some think it is irrational to do so and others don't think the probability is real give the past 10 years' experience.

The probability of dying in a car accident is low. Fewer than 11 people per 100,000 die in the US each year that way. Yet I would guess the people who scorn multi-institutional diversification wouldn't hesitate to spend 3-4% more on a car for their young daughter that had the latest safety equipment--and they would rationalize it on protection from harm AND death.

We CANNOT predict the occurrence of a new harmful event but we CAN easily prepare against it.

In any event, it is interesting...
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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vineviz
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Re: Does anyone consider institutional risk?

Post by vineviz » Sat Oct 13, 2018 11:41 am

Ron Scott wrote:
Sat Oct 13, 2018 11:19 am
vineviz wrote:
Fri Oct 12, 2018 11:28 am
LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration?
People do all sorts of irrational things, and I'm sure (based on comments I've read before) that some people here do this irrational thing.
edgeagg wrote:
Fri Oct 12, 2018 12:44 pm
OK. So how many times have VG and Fido been hacked and customer accounts compromised over the last 10 years? None that I am aware of.

It is interesting to see how people make decisions about avoiding losses with small probabilities of occurrence.

We all have the ability to separate our funds, at very little expense to us, into 2 or more institutions. Some think it is irrational to do so and others don't think the probability is real give the past 10 years' experience.

The probability of dying in a car accident is low. Fewer than 11 people per 100,000 die in the US each year that way. Yet I would guess the people who scorn multi-institutional diversification wouldn't hesitate to spend 3-4% more on a car for their young daughter that had the latest safety equipment--and they would rationalize it on protection from harm AND death.

We CANNOT predict the occurrence of a new harmful event but we CAN easily prepare against it.

In any event, it is interesting...
One difference is that the so-called institutional risk has both an unknown (but likely infinitesimal) chance of occurring AND an unknown (but likely infinitesimal) magnitude of harm.

I say the fear of such an event is irrational, while others say the lack of fear is irrational.

Another difference is that adding safety features to a car actually makes it safer. Spreading your money across institutions doesn’t lower your expected loss: it just replaces a small probability of a small loss with a larger probability of an even smaller loss.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Does anyone consider institutional risk?

Post by nisiprius » Sat Oct 13, 2018 12:02 pm

LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration? We all know that Vanguard and other mutual fund firms are not covered by any SIPC or other insurance, so, are there real risks to customers assets such as fraud, bankruptcy, or other non-market risks that investors should be wary of?

Also, if I move my assets from Vanguard to Vanguard brokerage, does that mean that all my assets, including Vanguard mutual funds, are then covered by SIPC and whatever other brokerage insurance they carry? If so, does that make the move worthwhile?
Let me take the second part first. NO. SIPC does not change the level of institutional risk, however much it is, of your mutual funds. I like to think of SIPC insurance as "statement accuracy insurance." It applies only to the extra layer of risk you incur by holding assets at a brokerage rather than holding them directly yourself (still possible but increasingly difficult).

By letting a brokerage hold them, you are risking the possibility of fraud (Madoff's firm gave clients false statements showing that they owned investments the firm had never bought for them) or mismanagement (when the SIPC was founded, there had been cases of back-office chaos and inability of firms to locate the stock certificates they had bought on clients' behalves). The SIPC insures you against that. It insures that if your statement says you own 40 shares of Apple, the firm has really bought 40 shares of Apple and is tracking them as yours.

The SIPC doesn't insure you against fraud or other loss in the securities yourself. If you were holding Enron stock in your SIPC-insured brokerage, you lost your money just as surely as an Enron employee who was owned the stock directly without SIPC insurance.

So, you start with a mutual fund. It is what it is. No direct government guarantees, but very good institutional protections from regulations affecting mutual funds, including the requirement that the fund's assets be held by an independent custodian bank and not by the fund itself; by tight limits on the use of direct leverage (borrowed money) by the fund; guaranteed daily liquidity and requirements that most of the holdings be liquid; etc. It is what it is.

Now, if you hold this fund at a brokerage instead of holding it directly, you add what might be called brokerage risk on top of the intrinsic risks of the fund. All the SIPC insurance does is (hopefully) to cancel out that added risk.

As to the first part: I'm not sure discussions of ultimate safety ever get you much of anywhere. The bad things that happen will come as surprises that probably can't have been anticipated--or they wouldn't have happened. Holding investments at multiple firms has tradeoffs. The obvious one is that it simultaneously reduces the risk of losing--or losing access to--all of your assets, while, at the same time, doubling the risk of losing--or losing access to--some of your assets. Charles Lindbergh intentionally opted for a single-engine plane because a) he thought engines were now reliable enough, and b) he didn't believe you could make it safely across the Atlantic in a three-engined plane with one engine out.

For a long time I had accounts about both Vanguard and Fidelity. I thought it was neat that I could constantly compare the two and judge quality of customer service. And of course if some place hits you with some nasty new nuisance fee and says "oh, everybody is doing that now," you may be able to tell whether or not they are lying.

I eventually decided disadvantages of complexity outweighed my judgements of "institutional risk." For example, it was a nuisance importing data from two places into a spreadsheet to get an overview... and using any kind of aggregation service like Mint required me to give a third party my passwords, obviously increasing my risk and possibly violating my customer agreements with my investment firms.
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Re: Does anyone consider institutional risk?

Post by Ron Scott » Sat Oct 13, 2018 12:11 pm

vineviz wrote:
Sat Oct 13, 2018 11:41 am

I say the fear of such an event is irrational, while others say the lack of fear is irrational.
We do not know...
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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BoglePaul
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Re: Does anyone consider institutional risk?

Post by BoglePaul » Sat Oct 13, 2018 12:25 pm

I remember Pershing having some issues during the financial crisis which my be why Vanguard dumped them right afterward and became their own fiduciary. I think Charles Schwab uses Pershing so I avoid them. Additionally, TD Ameritrade is Canadian so I avoid them. Fidelity is privately owned and last I heard up to the neck in debt. I feel Vanguard has the lowest institutional risk.

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Re: Does anyone consider institutional risk?

Post by 2015 » Sat Oct 13, 2018 12:26 pm

vineviz wrote:
Fri Oct 12, 2018 11:28 am
LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration?
People do all sorts of irrational things, and I'm sure (based on comments I've read before) that some people here do this irrational thing.

Mutual funds and brokerage accounts are among the most heavily regulated and scrutinized businesses in America. If there is such a thing as "institutional risk" in this context, I'm not sure how you'd begin to measure it.
I do not at all disagree with you (which is why I have chosen not to diversify against institutional risk). OTOH...
SMALL PROBABILITIES ARE MISJUDGED EASILY
Small probabilities can be misjudged in different ways. when probabilities are clearly specified, decision
makers often tend to overweight outcomes associated with small probabilities. Certain procedures for eliciting
probability estimates from experts can, in some context, also result in misjudgements. when people draw on
their own personal experience, events with small probabilities are easily ignored or downplayed. This can lead
to serious misperceptions in the context of catastrophe risks.
https://kar.kent.ac.uk/33993/1/Reasonin ... 0risks.pdf

Yet again, OTOH (and to your point)...institutional risk may be one of those small(er) probability events yet how many people are conscious of what they put in their mouths every day (i.e., bad diets = high probability risk of heart disease)? Seems highly irrational to me to be worried about low(er) probability institutional risk if one is slowly killing oneself via poor diet and exercise.

delamer
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Re: Does anyone consider institutional risk?

Post by delamer » Sat Oct 13, 2018 12:44 pm

vineviz wrote:
Sat Oct 13, 2018 11:41 am
Ron Scott wrote:
Sat Oct 13, 2018 11:19 am
vineviz wrote:
Fri Oct 12, 2018 11:28 am
LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration?
People do all sorts of irrational things, and I'm sure (based on comments I've read before) that some people here do this irrational thing.
edgeagg wrote:
Fri Oct 12, 2018 12:44 pm
OK. So how many times have VG and Fido been hacked and customer accounts compromised over the last 10 years? None that I am aware of.

It is interesting to see how people make decisions about avoiding losses with small probabilities of occurrence.

We all have the ability to separate our funds, at very little expense to us, into 2 or more institutions. Some think it is irrational to do so and others don't think the probability is real give the past 10 years' experience.

The probability of dying in a car accident is low. Fewer than 11 people per 100,000 die in the US each year that way. Yet I would guess the people who scorn multi-institutional diversification wouldn't hesitate to spend 3-4% more on a car for their young daughter that had the latest safety equipment--and they would rationalize it on protection from harm AND death.

We CANNOT predict the occurrence of a new harmful event but we CAN easily prepare against it.

In any event, it is interesting...
One difference is that the so-called institutional risk has both an unknown (but likely infinitesimal) chance of occurring AND an unknown (but likely infinitesimal) magnitude of harm.

I say the fear of such an event is irrational, while others say the lack of fear is irrational.

Another difference is that adding safety features to a car actually makes it safer. Spreading your money across institutions doesn’t lower your expected loss: it just replaces a small probability of a small loss with a larger probability of an even smaller loss.
I make no claim to being a cyber security expert. However, my guess is that if you surveyed a bunch of them that they would say that the chance of some major financial institution’s computer systems being hacked is much greater than infinitesimal.

But each of us needs to make our own risk assessment and act accordingly.

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Re: Does anyone consider institutional risk?

Post by Call_Me_Op » Sat Oct 13, 2018 12:51 pm

vineviz wrote:
Fri Oct 12, 2018 11:57 am
delamer wrote:
Fri Oct 12, 2018 11:36 am
We keep assets in a couple different places because of concerns about identify theft or one institution’s online system being hacked.
Doesn't this double or triple the chances that you'll have assets at an institution which gets hacked?
Yes, but virtually eliminates the risk of catastrophic loss (assuming independent probabilities of fraud). That's the whole point.
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vineviz
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Re: Does anyone consider institutional risk?

Post by vineviz » Sat Oct 13, 2018 1:00 pm

delamer wrote:
Sat Oct 13, 2018 12:44 pm
I make no claim to being a cyber security expert. However, my guess is that if you surveyed a bunch of them that they would say that the chance of some major financial institution’s computer systems being hacked is much greater than infinitesimal.
Even if that's true (and I'm not convinced it is) it's not enough for the firm to be hacked: they'd have to be hacked in such a way that customers were materially harmed.

That's a pretty low probability event, I think we can all agree.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Earl Lemongrab
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Re: Does anyone consider institutional risk?

Post by Earl Lemongrab » Sat Oct 13, 2018 1:03 pm

Multiple accounts actually increases the risk that something will happen your assets. It does reduce the risk of something happening to all of your assets.

But no, I don't spend any time worrying about that. I have accounts at multiple custodians for different reasons.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Does anyone consider institutional risk?

Post by nisiprius » Sat Oct 13, 2018 1:04 pm

Call_Me_Op wrote:
Sat Oct 13, 2018 12:51 pm
...Yes, but virtually eliminates the risk of catastrophic loss (assuming independent probabilities of fraud). That's the whole point...
I'm not sure it does eliminate it. Of course I'm just engaging in creative storytelling, not realistic risk assessment...

...But if I were going to fuss about it, I think I would make a point of looking--in the Statement of Additional Information, IIR--for the name of the "custodian," such as JPMorgan Chase, and would diversify across fund custodians.

To get back to your "risk of catastrophic loss," if you own the same mutual fund in two different brokerages, you've changed the risk picture with regard to the brokerages themselves (and their back offices, etc.) but you still have a common risk in the mutual fund itself. And if you own different mutual funds that use the same custodian bank, then it seems to me that you have common institutional risk at the level of the custodian bank.

If some unthinkably impossible thing--I don't know enough about banking to make up a credible possibility--happened to JPMorgan Chase, a hacker stole every stock out of JPMorgan Chase's custodial account, I don't know--yeah, they have insurance against that, but What If the insurance... well, anyway, if JPMorgan Chase everything it held vanished into some blockchain, that would presumably cause catastrophic problems for everyone whose mutual fund used it as their custodian, regardless of the name of the brokerage or the mutual fund company.

I'm not saying that's where the risk is. I'm saying that this kind of risk is darned hard to assess.
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Re: Does anyone consider institutional risk?

Post by mrspock » Sat Oct 13, 2018 1:07 pm

LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration? We all know that Vanguard and other mutual fund firms are not covered by any SIPC or other insurance, so, are there real risks to customers assets such as fraud, bankruptcy, or other non-market risks that investors should be wary of?

Also, if I move my assets from Vanguard to Vanguard brokerage, does that mean that all my assets, including Vanguard mutual funds, are then covered by SIPC and whatever other brokerage insurance they carry? If so, does that make the move worthwhile?
Vast majority of mine is at a single firm. While having the firm “hacked” is a risk, I just don’t consider is a high probability event vs the other things which require my attention.

IMO you need to wear a pretty big tin foil hat to come up with situations (perm loss of funds) which warrant spreading your money around vs. just using sensible measures like two factor security (for logins), randomly generated passwords, a good password vault like Apple’s keychain or LastPass and yes... keeping some statements around in paper form (which most probably do for taxes anyways(.

Your “attention/time” pie is so big... use it on things which have higher/known probabilities along with far more serious repercussions (like loss of health vs. a temp loss of access to money).

If you are super worried, just call your brokerage and ask them what would happen if _____; e.g. are you out the the money if they got hacked etc.

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Re: Does anyone consider institutional risk?

Post by delamer » Sat Oct 13, 2018 1:15 pm

vineviz wrote:
Sat Oct 13, 2018 1:00 pm
delamer wrote:
Sat Oct 13, 2018 12:44 pm
I make no claim to being a cyber security expert. However, my guess is that if you surveyed a bunch of them that they would say that the chance of some major financial institution’s computer systems being hacked is much greater than infinitesimal.
Even if that's true (and I'm not convinced it is) it's not enough for the firm to be hacked: they'd have to be hacked in such a way that customers were materially harmed.

That's a pretty low probability event, I think we can all agree.
No, we can’t all agree. At least I disagree.

You have said both that the risk is unknown and that it is infinitesimally small. Both those things can’t be true.

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Re: Does anyone consider institutional risk?

Post by vineviz » Sat Oct 13, 2018 1:17 pm

delamer wrote:
Sat Oct 13, 2018 1:15 pm
vineviz wrote:
Sat Oct 13, 2018 1:00 pm
delamer wrote:
Sat Oct 13, 2018 12:44 pm
I make no claim to being a cyber security expert. However, my guess is that if you surveyed a bunch of them that they would say that the chance of some major financial institution’s computer systems being hacked is much greater than infinitesimal.
Even if that's true (and I'm not convinced it is) it's not enough for the firm to be hacked: they'd have to be hacked in such a way that customers were materially harmed.

That's a pretty low probability event, I think we can all agree.
No, we can’t all agree. At least I disagree.

You have said both that the risk is unknown and that it is infinitesimally small. Both those things can’t be true.
Sure they can both be true: if the odds are somewhere between one in a billion and one in a quadrillion, if say the probability is both low and unknown.

But you probably disagree with that too. 😊
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Does anyone consider institutional risk?

Post by delamer » Sat Oct 13, 2018 1:20 pm

mrspock wrote:
Sat Oct 13, 2018 1:07 pm
LMK5 wrote:
Fri Oct 12, 2018 11:23 am
Anybody deliberately use different investment firms to lower "institutional risk," or is it not worth consideration? We all know that Vanguard and other mutual fund firms are not covered by any SIPC or other insurance, so, are there real risks to customers assets such as fraud, bankruptcy, or other non-market risks that investors should be wary of?

Also, if I move my assets from Vanguard to Vanguard brokerage, does that mean that all my assets, including Vanguard mutual funds, are then covered by SIPC and whatever other brokerage insurance they carry? If so, does that make the move worthwhile?
Vast majority of mine is at a single firm. While having the firm “hacked” is a risk, I just don’t consider is a high probability event vs the other things which require my attention.

IMO you need to wear a pretty big tin foil hat to come up with situations (perm loss of funds) which warrant spreading your money around vs. just using sensible measures like two factor security (for logins), randomly generated passwords, a good password vault like Apple’s keychain or LastPass and yes... keeping some statements around in paper form (which most probably do for taxes anyways(.

Your “attention/time” pie is so big... use it on things which have higher/known probabilities along with far more serious repercussions (like loss of health vs. a temp loss of access to money).

If you are super worried, just call your brokerage and ask them what would happen if _____; e.g. are you out the the money if they got hacked etc.
Actually, I don’t worry about permanent loss of funds.

My concern is not having access to my funds when I need them.

Keeping accounts in a couple different firms is not a significant drain on my personal resources (time, mental, etc.)

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Re: Does anyone consider institutional risk?

Post by delamer » Sat Oct 13, 2018 1:20 pm

vineviz wrote:
Sat Oct 13, 2018 1:17 pm
delamer wrote:
Sat Oct 13, 2018 1:15 pm
vineviz wrote:
Sat Oct 13, 2018 1:00 pm
delamer wrote:
Sat Oct 13, 2018 12:44 pm
I make no claim to being a cyber security expert. However, my guess is that if you surveyed a bunch of them that they would say that the chance of some major financial institution’s computer systems being hacked is much greater than infinitesimal.
Even if that's true (and I'm not convinced it is) it's not enough for the firm to be hacked: they'd have to be hacked in such a way that customers were materially harmed.

That's a pretty low probability event, I think we can all agree.
No, we can’t all agree. At least I disagree.

You have said both that the risk is unknown and that it is infinitesimally small. Both those things can’t be true.
Sure they can both be true: if the odds are somewhere between one in a billion and one in a quadrillion, if say the probability is both low and unknown.

But you probably disagree with that too. 😊
Yep! :D

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Re: Does anyone consider institutional risk?

Post by arcticpineapplecorp. » Sat Oct 13, 2018 1:43 pm

does this answer your question:

https://www.bogleheads.org/wiki/Vanguard_safety

from the link above (What if Vanguard went broke):
What if Vanguard went broke?

The following explanation was posted by Mel Lindauer:[1]

"This is a very serious and timely issue, so I'll address it to hopefully set everyone at ease.

First, The Vanguard Group Inc. (VGI) is actually a subsidiary of the various mutual funds, each of which is a separate legal entity. The best way to describe Vanguard's unique structure would be to think of General Motors turned upside down, with Chevrolet, Cadillac, Oldsmobile, Pontiac, etc. as the corporate parents, and General Motors as a subsidiary. If you think of Chevrolet, Cadillac, Oldsmobile, Pontiac, and the other GM divisions as mutual funds, and General Motors (the subsidiary, in this situation) as Vanguard Group Inc., you'll get the picture.

Since VGI is actually owned and funded by the various mutual funds,[notes 1] for all practical purposes, it won't go bankrupt unless all of the various mutual funds that support it went bankrupt. The only way that could happen would be for the value of all of the stocks and/or bonds held by each and every individual Vanguard mutual fund to go to zero. So, forget about Vanguard going bankrupt -- it just isn't going to happen.

It's also important to point out that even if VGI were to somehow go broke, VGI has no recourse to the assets of the funds. Rather, each fund's custodian holds that fund's assets. Even the fund managers do not have custody of their fund's holdings. They simply decide which stocks/bonds to sell, and the custodian actually delivers (in the case of a sale) or takes delivery (in the case of a purchase) of the actual asset.

Another huge and very important difference between Vanguard's mutual funds and the Enrons and WorldComs of the world is that Vanguard is required to "mark to market" (value each fund share based on the value of all of the fund's holdings) each day the market is open. That keeps the fund's books current. This "marking to market" pricing is subject to both routine and spot audits by both the SEC and the Pennsylvania Department of Banking.

One major reason for the lack of problems with mutual funds comes from the fact that they're regulated by the Investment Company Act of 1940, which spells out the legal responsibilities of the mutual funds to their investors. In addition to the provisions of the Investment Company Act of 1940, the SEC also directly regulates mutual funds. While the SEC can investigate fraud allegations against investors at public companies like Enron and WorldCom, where the accounting is much more complex than at mutual funds, it has no authority to set corporate governance rules for these public companies. These are huge differences.

Keep in mind, too, that, despite all of this, if something were to happen to the Vanguard Group (the entity that provides the fund with the administrative services they need to exist), the funds would continue to operate and would simply replace VGI with another entity to provide these same services.

Some have expressed concerns about putting "all their eggs in one basket" by consolidating their investments at Vanguard. There's simply no need to worry about that. Each fund is a separate investment company (and part owner of the Vanguard Group, rather than the other way around). Thus, having all of your investments in several Vanguard funds is tantamount to having your investments spread among a variety of baskets, each independent of the other. So, put your fears to rest; your investments are safe at Vanguard."
Remember that Vanguard has a mutual structure which other fund companies do not (it is a mutual mutual fund company). That is to say, the first two paragraphs explain the structure of Vanguard. The mutual funds own Vanguard.

Fidelity is not owned by its mutual funds, it's owned by Ned and Abigail Johnson (privately)

Charles Schwab is not owned by its mutual funds, it's owned by Wall Street, as in "Charles Schwab Corporation Common Stock, NYSE: SCHW"
(https://www.google.com/search?q=charles ... fox-b-1-ab)

This is not to say don't invest with Fidelity or Schwab. It is merely to point out there is a difference in the structure of these three companies. One is mutual, one is privately owned and one is publicly owned. Does it matter to you? Should it? It does to me. But you have to make up your own mind about what matters.
Last edited by arcticpineapplecorp. on Sat Oct 13, 2018 1:44 pm, edited 1 time in total.
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mrspock
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Re: Does anyone consider institutional risk?

Post by mrspock » Sat Oct 13, 2018 1:44 pm

delamer wrote:
Sat Oct 13, 2018 1:20 pm
Actually, I don’t worry about permanent loss of funds.

My concern is not having access to my funds when I need them.
Fair enough, but I struggle to come up with such a situation for myself. I have credit cards, family, friends... all could tide me over for a week or two.

I also have a job, since I don’t live pay check to pay check and save a good portion of it, I can easily redirect that money as needed (cancel direct deposit if required).

Now, me needing access to a significant portion of my savings if my (all?) bank collapses? Maybe if you could help me out here in the scenario? Swooping in and buying distressed assets during a major financial crisis?

dustinst22
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Re: Does anyone consider institutional risk?

Post by dustinst22 » Sat Oct 13, 2018 2:10 pm

edgeagg wrote:
Fri Oct 12, 2018 12:44 pm
OK. So how many times have VG and Fido been hacked and customer accounts compromised over the last 10 years? None that I am aware of.
10 years is hardly statistically significant, that's a very small time period. Internet security breaches are becoming much more common, even within heavily secured businesses. It's absolutely a valid concern to have.

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Re: Does anyone consider institutional risk?

Post by delamer » Sat Oct 13, 2018 2:14 pm

mrspock wrote:
Sat Oct 13, 2018 1:44 pm
delamer wrote:
Sat Oct 13, 2018 1:20 pm
Actually, I don’t worry about permanent loss of funds.

My concern is not having access to my funds when I need them.
Fair enough, but I struggle to come up with such a situation for myself. I have credit cards, family, friends... all could tide me over for a week or two.

I also have a job, since I don’t live pay check to pay check and save a good portion of it, I can easily redirect that money as needed (cancel direct deposit if required).

Now, me needing access to a significant portion of my savings if my (all?) bank collapses? Maybe if you could help me out here in the scenario? Swooping in and buying distressed assets during a major financial crisis?
We have a large amount of cash set aside for a downpayment on a 2nd home.

Let’s say we are going to settlement on Tuesday. And all of our money is at one financial institution that is hacked on Monday, so that our accounts are frozen.

No settlement.

But if we have our assets spread across a couple institutions, we could pull the money from our other accounts to cover the settlement.

(This is not completely theoretical. I had friends who had their downpayment in a savings account at a state-accredited credit union. The account was temporarily frozen due to massive irregularities by management, and their settlement was delayed.)

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mrspock
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Re: Does anyone consider institutional risk?

Post by mrspock » Sat Oct 13, 2018 3:11 pm

delamer wrote:
Sat Oct 13, 2018 2:14 pm
We have a large amount of cash set aside for a downpayment on a 2nd home.

Let’s say we are going to settlement on Tuesday. And all of our money is at one financial institution that is hacked on Monday, so that our accounts are frozen.

No settlement.

But if we have our assets spread across a couple institutions, we could pull the money from our other accounts to cover the settlement.

(This is not completely theoretical. I had friends who had their downpayment in a savings account at a state-accredited credit union. The account was temporarily frozen due to massive irregularities by management, and their settlement was delayed.)
While the stars aligning as your describe aren’t impossible, I wouldn’t worry too much. You’d have to have an exceptional run of bad luck (bank problems JUST as you are about to close) and even then, there are other houses. I’d also use the super power of humans: rationalization... and endlessly convince myself it wasn’t meant to be, or how I like the other house I bought even more! Problem solved and I can keep my financial life simple and efficient :D .

delamer
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Re: Does anyone consider institutional risk?

Post by delamer » Sat Oct 13, 2018 3:58 pm

mrspock wrote:
Sat Oct 13, 2018 3:11 pm
delamer wrote:
Sat Oct 13, 2018 2:14 pm
We have a large amount of cash set aside for a downpayment on a 2nd home.

Let’s say we are going to settlement on Tuesday. And all of our money is at one financial institution that is hacked on Monday, so that our accounts are frozen.

No settlement.

But if we have our assets spread across a couple institutions, we could pull the money from our other accounts to cover the settlement.

(This is not completely theoretical. I had friends who had their downpayment in a savings account at a state-accredited credit union. The account was temporarily frozen due to massive irregularities by management, and their settlement was delayed.)
While the stars aligning as your describe aren’t impossible, I wouldn’t worry too much. You’d have to have an exceptional run of bad luck (bank problems JUST as you are about to close) and even then, there are other houses. I’d also use the super power of humans: rationalization... and endlessly convince myself it wasn’t meant to be, or how I like the other house I bought even more! Problem solved and I can keep my financial life simple and efficient :D .
Well, I am surprised that someone with the screen name of “mrspock” would stoop to using rationalizations.

And I’ll leave it at that. :wink:

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Re: Does anyone consider institutional risk?

Post by UpperNwGuy » Sat Oct 13, 2018 6:06 pm

arcticpineapplecorp. wrote:
Sat Oct 13, 2018 1:43 pm
Remember that Vanguard has a mutual structure which other fund companies do not (it is a mutual mutual fund company). That is to say, the first two paragraphs explain the structure of Vanguard. The mutual funds own Vanguard.

Fidelity is not owned by its mutual funds, it's owned by Ned and Abigail Johnson (privately)

Charles Schwab is not owned by its mutual funds, it's owned by Wall Street, as in "Charles Schwab Corporation Common Stock, NYSE: SCHW"
(https://www.google.com/search?q=charles ... fox-b-1-ab)

This is not to say don't invest with Fidelity or Schwab. It is merely to point out there is a difference in the structure of these three companies. One is mutual, one is privately owned and one is publicly owned. Does it matter to you? Should it? It does to me. But you have to make up your own mind about what matters.
It doesn't matter to me. I find all three structures to be perfectly acceptable to my needs.

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Re: Does anyone consider institutional risk?

Post by Call_Me_Op » Sun Oct 14, 2018 8:02 am

nisiprius wrote:
Sat Oct 13, 2018 1:04 pm
Call_Me_Op wrote:
Sat Oct 13, 2018 12:51 pm
...Yes, but virtually eliminates the risk of catastrophic loss (assuming independent probabilities of fraud). That's the whole point...
I'm not sure it does eliminate it. Of course I'm just engaging in creative storytelling, not realistic risk assessment...

...But if I were going to fuss about it, I think I would make a point of looking--in the Statement of Additional Information, IIR--for the name of the "custodian," such as JPMorgan Chase, and would diversify across fund custodians.

To get back to your "risk of catastrophic loss," if you own the same mutual fund in two different brokerages, you've changed the risk picture with regard to the brokerages themselves (and their back offices, etc.) but you still have a common risk in the mutual fund itself. And if you own different mutual funds that use the same custodian bank, then it seems to me that you have common institutional risk at the level of the custodian bank.

If some unthinkably impossible thing--I don't know enough about banking to make up a credible possibility--happened to JPMorgan Chase, a hacker stole every stock out of JPMorgan Chase's custodial account, I don't know--yeah, they have insurance against that, but What If the insurance... well, anyway, if JPMorgan Chase everything it held vanished into some blockchain, that would presumably cause catastrophic problems for everyone whose mutual fund used it as their custodian, regardless of the name of the brokerage or the mutual fund company.

I'm not saying that's where the risk is. I'm saying that this kind of risk is darned hard to assess.
I agree that one should take advantage of all diversification opportunities within reason, and this includes diversification across asset classes, countries, custodians, and mutual funds/ETFs
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Does anyone consider institutional risk?

Post by edgeagg » Mon Oct 15, 2018 7:37 am

dustinst22 wrote:
Sat Oct 13, 2018 2:10 pm
edgeagg wrote:
Fri Oct 12, 2018 12:44 pm
OK. So how many times have VG and Fido been hacked and customer accounts compromised over the last 10 years? None that I am aware of.
10 years is hardly statistically significant, that's a very small time period. Internet security breaches are becoming much more common, even within heavily secured businesses. It's absolutely a valid concern to have.
The point being made was:
(1) In terms of risks that led to permanent unavailability of financial resources at these institutions, I simply don't know how to estimate the probability of VG being hacked tomorrow and 5.1T of assets being siphoned off permanently. Do you?

(2) OTOH I do know from past experience that level of load on the website related to market events (going down/up) lead to unavailability of the web service. However, the same market event led to correlated unavailability of VG and Fido due to high traffic. But this form of unavailability is a form of "stay the course" :beer . It might actually save you from yourself.

(3) Like Nisiprius, I personally find that holding money at n different institutions makes it harder to manage. So, like most people, one makes reasonable allowance for risk vs convenience.

(4) I recognize that there may be others whose personal risk profile leads them to making other decisions. I don't seek to persuade them.

All Seasons
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Re: Does anyone consider institutional risk?

Post by All Seasons » Mon Oct 15, 2018 7:48 am

MF Global.

:shock:
The market portfolio is always a legitimate portfolio.

JackoC
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Re: Does anyone consider institutional risk?

Post by JackoC » Tue Oct 16, 2018 10:35 am

nisiprius wrote:
Sat Oct 13, 2018 12:02 pm


As to the first part: I'm not sure discussions of ultimate safety ever get you much of anywhere. The bad things that happen will come as surprises that probably can't have been anticipated--or they wouldn't have happened. Holding investments at multiple firms has tradeoffs. The obvious one is that it simultaneously reduces the risk of losing--or losing access to--all of your assets, while, at the same time, doubling the risk of losing--or losing access to--some of your assets. Charles Lindbergh intentionally opted for a single-engine plane because a) he thought engines were now reliable enough, and b) he didn't believe you could make it safely across the Atlantic in a three-engined plane with one engine out.
Doubling the number of stocks you hold from one to two basically also doubles the risk of catastrophic idiosyncratic event in a stock. We go way past two of course to enough stocks for idiosyncratic big loss events to become a virtual certainty in at least one of our stocks, but a negligible event overall. But even at one v. two stocks I doubt many people would make the argument for one over two because there was more likelihood of a real financial/earning/CEO/whatever disaster in one of two companies than one company. I don't find that argument any more convincing for one investment custodian v two or a few.

However I grant you have to take into account perceived likelihood, and also whether the unknown unknown risks would really be independent. That can be illustrated by further examination of the Lindbergh example. At the time of Lindbergh's famous flight almost all props were still fixed pitch. If an engine gave out and assuming the prop froze in place it wasn't only not providing propulsion but creating serious drag. Once prop blades could be feathered and produce minimal drag on a stopped engine, multi-engine redundancy became more meaningful. The analogy to financial institutions is true independence of events. What is going to happen at Vanguard that's not happening elsewhere, or a 'drag' on the whole system enough to bring it down. And some twin engine planes even in WWII did not have enough power designed in to fly indefinitely on half power even with the bad engine feathered: it required more than just two engines, each one had to be powerful enough to maintain flight. It might be analogized to a total personal disaster if you lose half your assets. Or, the fault could be analogous to bad fuel, feeding all the engines and they all stop, etc.

Anyway I calculate around 60% of our assets are with Vanguard. Which would be way too much if I believed there was a likely scenario to lose that money through fault of Vanguard (as opposed to market moves). But the total also includes CD's, savings accounts, house and rental properties. I do also have a non-minor % with Interactive Brokers but that's mainly because holding ETF's there I get access to emergency liquidity via margin loan (at 1%'s better rates than other retail brokers) which I wouldn't holding ETF's at Vanguard. I have more minor %'s with a couple of other brokers for specific reasons other than diversification. If those reasons go away so will the accounts. I would not however feel comfortable with nearly 100% of *all* assets at one broker including Vang, and would not feel it necessary to know in advance and explain the exact scenario where it would cause a problem. I just would not do it.

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Re: Does anyone consider institutional risk?

Post by NPT » Tue Oct 16, 2018 3:15 pm

dustinst22 wrote:
Sat Oct 13, 2018 2:10 pm
edgeagg wrote:
Fri Oct 12, 2018 12:44 pm
OK. So how many times have VG and Fido been hacked and customer accounts compromised over the last 10 years? None that I am aware of.
10 years is hardly statistically significant, that's a very small time period. Internet security breaches are becoming much more common, even within heavily secured businesses. It's absolutely a valid concern to have.
I work with computer technology and I am on friendly terms with someone in a high level cyber security job at a large financial firm. My understanding is that not only are computer security breaches becoming more common (and not all of them are publicly reported), but the methodology and the arsenals of both attackers and defenders are continuously evolving. The future is practically guaranteed to be different than the past (or the present) and it is very hard to tell in what way it will be different.

Estimating the likelihood of permanently losing assets due to hacking would be very difficult, and I will not attempt that. Nor will I comment on other types of risks such as insider fraud. But I believe that spreading at the very least your emergency reserve between multiple financial institutions (banks) is prudent and is well worth the small effort. If something goes wrong with your account, then it is entirely possible, even if not particularly likely, that it could take much longer than just a week or so to regain access.

lws6772
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Re: Does anyone consider institutional risk?

Post by lws6772 » Tue Oct 16, 2018 5:40 pm

BoglePaul wrote:
Sat Oct 13, 2018 12:25 pm
I remember Pershing having some issues during the financial crisis which my be why Vanguard dumped them right afterward and became their own fiduciary. I think Charles Schwab uses Pershing so I avoid them. Additionally, TD Ameritrade is Canadian so I avoid them. Fidelity is privately owned and last I heard up to the neck in debt. I feel Vanguard has the lowest institutional risk.
Hard to believe Fidelity would be up to their neck in debt, figured they would be rolling fat. Maybe trying to compete with Vanguard they took a hit.

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Re: Does anyone consider institutional risk?

Post by edgeagg » Tue Oct 16, 2018 6:23 pm

NPT wrote:
Tue Oct 16, 2018 3:15 pm
But I believe that spreading at the very least your emergency reserve between multiple financial institutions (banks) is prudent and is well worth the small effort. If something goes wrong with your account, then it is entirely possible, even if not particularly likely, that it could take much longer than just a week or so to regain access.
Mostly agree. People here probably have a bond/CD/money market account outside their investment accounts to maintain low latency access to liquid assets. But again, it is a risk vs. convenience tradeoff since I could take the above argument to split my liquid assets across multiple institutions.

OTOH if VG was hacked and it took a week to recover my VG investments, I wouldn't be hugely concerned provided that I had eventual consistency. Why? Since my rebalancing only happens every few months. But rebalancing across VG/Fido/... would be a pain in the patootie. I'd probably be tempted to use an aggregator for convenience, which then is a single point of failure.

Also, since I ride my bike every day, I'm way more likely to be squashed flat by some suburban soccer mom than have my account drained by the FSB. Competing risks.

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