SIPC coverage... Simple questions

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Dink2018
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SIPC coverage... Simple questions

Post by Dink2018 » Mon Dec 02, 2019 9:22 pm

Hello,

My understanding of SIPC coverage is basically that it kicks in if you are defrauded from the brokerage. EG: if I have 750k in an account and it goes to zero because of an employee theft (guy gets convicted) real simple example.

I'd be out $250k right?

So the questions are.

1: Am I understanding the basics correctly, its coverage for unlikely things, like the above.

2: People with large sums of money, do they just create more accounts?

- EG should you create another account each time you fill one to $500k Seems so if I'm understanding things. Its easy and fast to create an account, the idea that I could expose my entire net-worth to something that I could have avoided by creating another account makes this an easy decision.

3: I have one login with Vanguard and 5 accounts with them. So that means the insurance is up to $500k on each account not one login correct?

I'm not filling accounts fast enough that this is a real issue for me at present but I just want to make sure I understand. I'd prefer the simplest way to do it, like if I could pay Vanguard for extra insurance above the first 500k so I could just use one account.

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Re: SIPC coverage... Simple questions

Post by RickBoglehead » Mon Dec 02, 2019 9:26 pm

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Dink2018
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Re: SIPC coverage... Simple questions

Post by Dink2018 » Mon Dec 02, 2019 9:33 pm

Thanks Rick

So the "aggregate" limit is..

1: all vanguard accounts on the planet
2: my total amount in all my vanguard accounts

I'm not exactly sure. EG: If there was a widespread theft and it clearly exceeded the 250m cap for aggregate does that mean all the other people are exposed.

I'm nowhere near $50m so I'm feeling pretty good about it, seems like there is no real reason to worry. I'll go back to work and make more $$

It's curious why the cash limits are so much less than securities. I wonder why that is..

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Re: SIPC coverage... Simple questions

Post by AlohaJoe » Mon Dec 02, 2019 9:34 pm

Dink2018 wrote:
Mon Dec 02, 2019 9:22 pm
2: People with large sums of money, do they just create more accounts?
So you think that Bill Gates has, what?, over 100,000 different brokerage accounts?

Rich people don't care about SIPC coverage. I don't know anyone with over $1 million who has ever thought about it. They certainly don't have 5 or 10 or 20 brokerage accounts.

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nisiprius
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Re: SIPC coverage... Simple questions

Post by nisiprius » Mon Dec 02, 2019 9:40 pm

1) SIPC web page: Investors with Multiple Accounts See that page for more details. No, you can't easily get unlimited SIPC coverage by creating large numbers of accounts. They give some examples of how it works:
The following are examples of separate accounts:
  • Mary has an account in her name at her brokerage firm. Mary is protected by SIPC up to $500,000.
  • Joe has two brokerage accounts, each in his own name. For purposes of SIPC protection, Joe’s accounts are combined, and Joe is protected by SIPC only up to a total of $500,000.
  • Joe and Mary are married and they have a joint brokerage account which is separate from the individual accounts that they each have at the firm. An additional maximum of $500,000 of SIPC protection is available for the joint account.
  • Joe has a Roth account and an IRA account, at the same brokerage. Joe is protected up to $500,000 for the Roth account and up to $500,000 for his IRA account.
2) Above the $500,000 limit, Vanguard has additional protection from a private insurer which takes over where SIPC leaves off and covers up to $49.5 million in securities.

3) I think of SIPC as basically "statement insurance." It is insurance that if your statement says you own 100 shares of GE stock, you really do. If you ask the brokerage to give them to you, and, for whatever reason they can't find them, then SIPC makes up the loss. It protects against fraud or carelessness in their custodianship of your securities.

SIPC doesn't protect you against fraud or dollar loss within the securities themselves. If you bought Enron stock that's not SIPC's problem. More to the point, it doesn't protect you against fraud or mishandling within a mutual fund; there's a different set of regulations, the Investment Company Act of 1940, that are supposed to protect you by making shenanigans difficult.
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Dink2018
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Re: SIPC coverage... Simple questions

Post by Dink2018 » Mon Dec 02, 2019 10:19 pm

nisiprius wrote:
Mon Dec 02, 2019 9:40 pm
1) SIPC web page: Investors with Multiple Accounts See that page for more details. No, you can't easily get unlimited SIPC coverage by creating large numbers of accounts. They give some examples of how it works:
The following are examples of separate accounts:
  • Mary has an account in her name at her brokerage firm. Mary is protected by SIPC up to $500,000.
  • Joe has two brokerage accounts, each in his own name. For purposes of SIPC protection, Joe’s accounts are combined, and Joe is protected by SIPC only up to a total of $500,000.
  • Joe and Mary are married and they have a joint brokerage account which is separate from the individual accounts that they each have at the firm. An additional maximum of $500,000 of SIPC protection is available for the joint account.
  • Joe has a Roth account and an IRA account, at the same brokerage. Joe is protected up to $500,000 for the Roth account and up to $500,000 for his IRA account.
2) Above the $500,000 limit, Vanguard has additional protection from a private insurer which takes over where SIPC leaves off and covers up to $49.5 million in securities.

3) I think of SIPC as basically "statement insurance." It is insurance that if your statement says you own 100 shares of GE stock, you really do. If you ask the brokerage to give them to you, and, for whatever reason they can't find them, then SIPC makes up the loss. It protects against fraud or carelessness in their custodianship of your securities.

SIPC doesn't protect you against fraud or dollar loss within the securities themselves. If you bought Enron stock that's not SIPC's problem. More to the point, it doesn't protect you against fraud or mishandling within a mutual fund; there's a different set of regulations, the Investment Company Act of 1940, that are supposed to protect you by making shenanigans difficult.
Thanks all for the feedback. Mods can close the thread unless anyone has other points. It looks like there is no reason for me to worry or think about this given Vanguard having coverage up to 50m, I'm light years away from that.

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Re: SIPC coverage... Simple questions

Post by AlohaJoe » Mon Dec 02, 2019 10:20 pm

nisiprius wrote:
Mon Dec 02, 2019 9:40 pm
2) Above the $500,000 limit, Vanguard has additional protection from a private insurer which takes over where SIPC leaves off and covers up to $49.5 million in securities.
This is true -- and all brokerages do something similar -- but also keep in mind that it is also mostly worthless due to aggregate limits. For instance, Vanguard's aggregate limit is $250 million. Vanguard has 20 million customers so that works out to a paltry $12.50 per customer in insurance.

If we try to imagine scenarios under which the insurance comes into play...it is hard to imagine a scenario where that's enough. Vanguard decides to defraud some customers? And they aren't sued into oblivion?

It is hard to imagine a case of fraud at Vanguard that doesn't fall into one of two categories. They will either a) pay and make it up regardless of insurance coverage or b) shut down entire funds because the fraud exceeds $250 million and people lose billions of dollars destroying the US economy.

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Re: SIPC coverage... Simple questions

Post by 123 » Mon Dec 02, 2019 10:56 pm

The SIPC annual report for 2018 indicates their total assets are a shade under $ 3.3 billion https://www.sipc.org/media/annual-repor ... report.pdf

To me $ 3.3 billion really doesn't go very far these days, particularly if there is a major calamity impacting a large brokerage.
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Re: SIPC coverage... Simple questions

Post by OnTrack » Mon Dec 02, 2019 11:19 pm

Dink2018 wrote:
Mon Dec 02, 2019 10:19 pm
Thanks all for the feedback. Mods can close the thread unless anyone has other points. It looks like there is no reason for me to worry or think about this given Vanguard having coverage up to 50m, I'm light years away from that.
Just as long as you understand that the 50m is not for your account only. If there was some kind of massive losses at Vanguard affecting multiple customers, that 50m would need to be shared among all the customers with losses. In any case, this isn't something that I worry about. Securities at a brokerage are supposed to be segregated so that even if the broker becomes bankrupt, the securities should be recoverable. I am more worried about identity theft which the SIPC does not cover.

I do try to be sure that I don't exceed FDIC (banks) or NCUA (credit unions) limits because banks do occasionally fail (for example, Washington Mutual and IndyMac). Per FDIC there have been 559 bank failures since Oct. 1, 2000
https://www.fdic.gov/bank/individual/fa ... klist.html

dru808
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Re: SIPC coverage... Simple questions

Post by dru808 » Mon Dec 02, 2019 11:56 pm

Why does vanguard state their old mutual fund only accounts are not SIPC insured? Is this a way to scare people into switching over to the brokerage account?

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Re: SIPC coverage... Simple questions

Post by AlohaJoe » Tue Dec 03, 2019 12:13 am

dru808 wrote:
Mon Dec 02, 2019 11:56 pm
Why does vanguard state their old mutual fund only accounts are not SIPC insured? Is this a way to scare people into switching over to the brokerage account?
SIPC is only for brokerage accounts. If you don't hold mutual funds in a brokerage account, then they are not -- cannot -- be covered by SIPC.

But SIPC also makes no sense in that situation. What do you think SIPC would protect against in that scenario? There are no custodian issues.

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House Blend
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Re: SIPC coverage... Simple questions

Post by House Blend » Tue Dec 03, 2019 9:32 am

dru808 wrote:
Mon Dec 02, 2019 11:56 pm
Is this a way to scare people into switching over to the brokerage account?
Precisely.

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Phineas J. Whoopee
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Re: SIPC coverage... Simple questions

Post by Phineas J. Whoopee » Tue Dec 03, 2019 5:30 pm

Regarding coverage from Lloyd's of London, Vanguard's aggregate amount is $250,000,000. That's slightly less than five times the individual maximum of $51,400,000.

Compared to about $5.6 trillion of assets under management it barely registers.

I like Vanguard, but I've never been impressed with their excess coverage. I'm not impressed with any other firm's, either. They seem like Potemkin villages to me.

PJW

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