SIPC insurance and splitting money across brokers?

[newguy123]

Just watched this video https://www.youtube.com/watch?v=XZComkkxeEI

And it made me wonder, is it wise to split up money once it reaches the SIPClimit? This guy doesn't say how he lost all his money, but it seems like a bank failure in 2007-2008 of some type wiped out all his money (in his other video he said he had 3 million in the account). Also I think fdic limit was only 100k back in 2007 which was probably how this guy got screwed hard.

I am above the SIPClimit on my main investment account , but now wondering if I should be splitting the money into smaller accounts with other banks to stay below the SIPC limits ? and I know bank failures are very rare and it will be less than 1% chance it will ever happen to me

Edit: sorry meant to mean SIPC

[sport]

FDIC coverage applies only to bank CDs, savings accounts, checking accounts, and money market accounts. If you have other investment accounts through your bank, those would not be included in FDIC coverage and would not have FDIC protections. If your cash accounts are more than the FDIC limit, you should consider moving some to other banks, or change the ownership to allow for additional coverage (single account, joint accounts, beneficiaries, etc.)

[rockstar]

My understanding is that brokerage accounts aren't FDIC insured.

[newguy123]

Meant SIPC sorry, got it confused with FDIC

[000]

Sure, and also consider diversification across fund family.

SIPC protects against fraud/failure by the broker, not the underlying investment. It doesn't protect against fraud by the managers of a mutual fund or ETF or the managers of an individual stock.

[alex_686]

Did not watch the full 20 minute video - what point where they trying to make.

So I am going to say 2 contradictory things. I would require my brokerage to be SPIC insured. I don't think the coverage means that much.

The real value of SPIC insurance is that they come in and audit operation. Client assets should be segregated from brokerage assets so that if the brokerage blows up the client's money is safe. I have had ring side seats to a couple of brokers blowing up. I can only think of 1 time in the past 20 years where clients actually needed SPIC insurance when things blew up.

[newguy123]

Did not watch the full 20 minute video - what point where they trying to make.

So I am going to say 2 contradictory things. I would require my brokerage to be SPIC insured. I don't think the coverage means that much.

The real value of SPIC insurance is that they come in and audit operation. Client assets should be segregated from brokerage assets so that if the brokerage blows up the client's money is safe. I have had ring side seats to a couple of brokers blowing up. I can only think of 1 time in the past 20 years where clients actually needed SPIC insurance when things blew up.

Basically the guy had 3 million tied up in either a investment portfolio or bank account (not sure which as he didn't say), but the financial firm holding his funds went backrupt and he lost it all ,then his father gets cancer and they take his father's house to pay the bills.

I know risk wise it is low to ever need SIPC or FDIC insurance, but I just don't want to end up like this guy since I worked very hard for my money over the years etc

[UpperNwGuy]

Did not watch the full 20 minute video - what point where they trying to make.

So I am going to say 2 contradictory things. I would require my brokerage to be SPIC insured. I don't think the coverage means that much.

The real value of SPIC insurance is that they come in and audit operation. Client assets should be segregated from brokerage assets so that if the brokerage blows up the client's money is safe. I have had ring side seats to a couple of brokers blowing up. I can only think of 1 time in the past 20 years where clients actually needed SPIC insurance when things blew up.

Basically the guy had 3 million tied up in either a investment portfolio or bank account (not sure which as he didn't say), but the financial firm holding his funds went backrupt and he lost it all ,then his father gets cancer and they take his father's house to pay the bills.

I know risk wise it is low to ever need SIPC or FDIC insurance, but I just don't want to end up like this guy since I worked very hard for my money over the years etc

This is all so vague. Without specifics, it's hard to figure out. I suspect that the guy's story has some untold chapters.

[123]

The SIPC Annual Report for the year ending 12/31/2019 shows they had total assets of $3.655 billion. That does not strike me as a large amount of money to pay claims.

It may not matter how many brokerages you split your assets among.

[whodidntante]

Generally, when a bank fails, no one actually loses money. They might lose interest, or special deals they had with the bank, but not deposit funds. That's because the FDIC rarely steps in with actual financial backing and by guaranteeing deposits. Instead, they find a sucker partner bank to purchase the failed bank's assets.

I think it's reasonable to have multiple brokerage accounts, mainly because they keep giving me money to open them. But also because brokers tend to have temporary problems, you can be a victim of fraud, or they can decide to lock you out of your account for various reasons. And by fraud, I mean someone dupes you or dupes your broker into giving your money away, irrecoverably.

Just don't put the family fortune in a toy fintech company that didn't exist 10 years ago. I'm not personally worried that Fidelity is showing me shares that were never purchased in order to cheat me.

I don't think you should consider that guy's story instructive unless he's willing to share what actually happened.

[whodidntante]

The SIPC Annual Report for the year ending 12/31/2019 shows they had total assets of $3.655 billion. That does not strike me as a large amount of money to pay claims.

It may not matter how many brokerages you split your assets among.

I think the value is more in the implicit Federal government guarantee. Although, if Vanguard turns out to be a huge ponzi scheme (which is close enough to impossible to call it impossible) then maybe they would back away slowly. Man, that would be a fun day on the forum.

[000]

Just watched this video https://www.youtube.com/watch?v=XZComkkxeEI

And it made me wonder, is it wise to split up money once it reaches the SIPClimit? This guy doesn't say how he lost all his money, but it seems like a bank failure in 2007-2008 of some type wiped out all his money (in his other video he said he had 3 million in the account). Also I think fdic limit was only 100k back in 2007 which was probably how this guy got screwed hard.

I watched the first few minutes and read some of the comments and it sounds like he purchased several homes and boats using loans.

Perhaps those loans came in part from (directly or indirectly) brokerage margin, which I imagine would have been a significant cause or contributor to a wipeout of a brokerage account. Something like the broker is sinking during a crash and starts calling margin loans. That seems far more likely to me than unleveraged fully owned client funds vanishing from a SIPC-insured US broker during the 2008 crash.

Splitting assets between custodians and fund families is a reasonable precaution IMO, but avoiding leverage is likely the real moral of this story.

[MikeG62]

I would not split my investments across multiple brokers because the value of those investments exceeds the amount of SIPC insurance as long as I was using a top tier broker. In fact, I would not use any broker other than a top tier broker so this is a non-issue for me.

As someone else said, if you wanted to have assets in a second broker because you were worried a cyberattack or some other calamity would make it difficult to access your funds for a period of time, that is a different issue/concern. Personally, I don't share this worry. However, I have access to lots of cash at FDIC insured banks and NCUA insured CU's. So if my broker was down for a while it would not present a financial issue for me. If 100% of your investments and cash were in one place (at one broker), that is a different story. As always, underlying facts and circumstances matter.

[newguy123]

Thanks for the response, I am not going to lose any sleep over this, I know the chance of it happening is rare and historically it doesn't happen often. I don't have enough over the SIPC insurance for me to worry about now so I probably won't need to do this unless something drastic happens to my portfolio.

[rich126]

I was trying to research SIPC and simply get confused. It seems like there is a $500K limit and some other gotchas. I know my broker, and I assume most of them, have additional insurance as well.

I gave up trying to figure it out and will worry about other stuff instead

As a safety thing I don't ever put all my money in any one bank, brokerage, credit card, etc. I have had, and known people who had issues with institutions and had issues getting their money anywhere from a very short period of time to over a year. Fortunately it didn't impact their life.

So while it can be nice to keep everything in one place, I think the inconvenience of having multiple places is rather trivial for the extra safety and sleep.

[nisiprius]

Please don't call it "insurance." SIPC stands for "Securities Investor Protection Corporation." The "I" is for "investor."

The FDIC is the "Federal Deposit Insurance Corporation" and does provide "insurance."

I think the difference is that "insurance" means doing something specific and predefined, whereas "protection" is loosey-goosey and gives them a lot of latitude about what they actually will do. The recovery process is a legal bankruptcy-like process and the SIPC decides how to handle it depending on how things go.

The SIPC only provides what I call "statement insurance," a guarantee that if your statement says you own 100 shares of BRK, or Enron, or whatever, that the brokerage really has those hundred shares somewhere earmarked for you... and if it doesn't, the SIPC will take care of you in some way. The SIPC's website says

SIPC protection is limited. SIPC only protects the custody function of the broker dealer, which means that SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins.... SIPC does not protect against the decline in value of your securities. SIPC does not protect individuals who are sold worthless stocks and other securities.

The key piece of information I don't have is "how often does this happen, nowadays, really?" The SIPC began in 1975 in an era where brokerages were in dire financial straits, did not have very good security, had not gotten up to speed with computers and data processing, had to hold and keep track of physical stock certificates, and organized crime was thought to be involved. It wasn't always a matter of theft, but apparently brokerage "back offices" were sloppy.

1973:


1969:


1967:


I don't know if this happens much any more. The SIPC was involved in the Madoff scandal, and apparently the people fleeced by Madoff were disappointed and unhappy with how the SIPC handled things.

Virtually all brokerages do carry some form of private excess insurance that covers holdings above the SIPC limit. I have no idea if it's any good. The SIPC website says:

Excess SIPC insurance is insurance provided by a private insurer and not by SIPC. The insurance is intended to protect brokerage customers against the risk that customers will not recover all of their cash and securities in the proceeding under the Securities Investor Protection Act (SIPA). Under many of these policies, customer eligibility for recovery is not determined until after the SIPA liquidation of the customer’s brokerage firm has concluded and the amount of the customer’s recovery in that proceeding has been established.

[rich126]

I went back and looked at TD Ameritrade and read the following:

TD Ameritrade, Inc. is a member of the Securities Investor Protection Corporation
(SIPC). Securities in your account protected up to $500,000, which includes a
$250,000 limit for cash. For details, please see www.sipc.org.

Additionally, TD Ameritrade provides each client $149.5 million worth of protection
for securities and $2 million of protection for cash through supplemental coverage
provided by London insurers.

In the event of a brokerage insolvency, a client may
receive amounts due from the trustee in bankruptcy and then SIPC. Supplemental
coverage is paid out after the trustee and SIPC payouts and under such coverage
each client is limited to a combined return of $152 million from a trustee, SIPC,
and London insurers.

The TD Ameritrade supplemental coverage has an
aggregate limit of $500 million over all customers. This policy provides coverage
following brokerage insolvency and does not protect against loss in market value
of the securities.

Still not something I will lose any sleep over.

[richard.h.gao]

Please don't call it "insurance." SIPC stands for "Securities Investor Protection Corporation." The "I" is for "investor."

Merrill calls it "insurance".

Your brokerage accounts are not FDIC insured, but rather accounts held with Merrill are SIPC insured. SIPC insurance covers your account up to $500,000 in equity with up to $250,000 in cash. Coverage above SIPC limits is covered by Lloyd's of London. Customers who have exceeded the full SIPC limits have further protection provided by the Lloyd's policy, subject to an aggregate loss limit of $1 billion for all customer claims, and includes up to $1.9 million cash per customer (excluding any FDIC eligible products within the account).

[hameshatumkochaha]

I came across this: https://www.brex.com/learn/cash-managem ... rotection/
While I agree that this is not something to lose sleep over, if one wants that protection, are the following the right strategies?
1. If someone has less than $500k assets and has one broker: one is covered as long as cash is not greater than $250k
2. For those who have between $500k and a couple of million, one can keep cash with FDIC insured banks such as BoA, $500k assets in related brokers such as Merrill for BoA etc, and other assets split between a few brokers $500k top (no cash).
3. For those who have a many million dollars, I guess strategies such as #2 above with many brokers. Additionally making joint account seems to double the insurance/coverage? "... SPIC ... covers joint accounts as two individual accounts."
4. Those who have many many millions / billions: I am no where close so I won't explore that... Likely such people might get formal guidance by fee based professionals?
Comments are welcome...
Thanks!

[nisiprius]

I think I have an answer. It is not "insurance," despite the fact that a Google search shows dozens of websites incorrectly calling it insurance. (It is "protection.")

I emailed the SIPC, using their general query email address, asksipc@sipc.org, noting an online exchange in which someone commented that a Merrill website refers to it as "insurance." I wrote:

My belief is that “insurance” has a specific legal meaning and that SIPC protection is not insurance and should not be called “insurance,” by Merrill or anyone else.

I’d appreciate it if you’d clarify this.

I received this response:

You are correct. The protection provided by SIPC under the Securities Investor Protection Act seeks to restore the securities and related cash which customers entrust to their brokerage firms. SIPC can make advances to Trustees of up to $500,000 for each customer with a sublimit of $250,000 for cash. SIPC does not use the term “insurance” in reference to its protection as it is not insurance in the classic sense, nor does it meet the definition of the term in various state statutes.

In addition to any legal requirements associated with the term “insurance,” use of the term may also lead investors to falsely believe that SIPC protection extends to market losses or many types of fraud which do not affect the custody of customer property.​

Also, as noted earlier, their website states

It is important to understand that SIPC is not the securities world equivalent of the Federal Deposit Insurance Corporation (FDIC), which insures depositors of insured banks.

[JoMoney]

...
Virtually all brokerages do carry some form of private excess insurance that covers holdings above the SIPC limit. I have no idea if it's any good. The SIPC website says:

Excess SIPC insurance is insurance provided by a private insurer and not by SIPC. The insurance is intended to protect brokerage customers against the risk that customers will not recover all of their cash and securities in the proceeding under the Securities Investor Protection Act (SIPA). Under many of these policies, customer eligibility for recovery is not determined until after the SIPA liquidation of the customer’s brokerage firm has concluded and the amount of the customer’s recovery in that proceeding has been established.

I know the big favorites (Vanguard, Schwab, E-Trade/Morgan Stanley, Merill Lynch, TD Ameritrade and Fidelity) all carry an insurance policy for "excess SIPC" coverage, but there are brokerages that do not. I've not been able to find such coverage for JP Morgan, M1, Robin Hood, and several others. I did find an article talking about JP Morgan dropping the excess coverage as they didn't think it was necessary. FWIW, I wouldn't want to be at a broker where I thought it might be needed, but I am comforted by the idea that having the excess coverage means there is some third-party insurance that has a stake in ensuring the operations at these firms are all above-board.
One additional "coverage" that I like to look for, is a customer protection guarantee for other types of fraud that are unique to brokerages, that might involve someone fraudulently transferring securities, or someone gaining access to your account and placing fraudulent trades you didn't authorize. Under Regulation E, consumers have some protections from fraudulent ACH or debit card transfers, and SIPC covers fraud/mis-accounting by the brokerage company itself, but there's nothing requiring coverage for the other types of electronic fraud if someone else gained access to your brokerage account.
Some brokerages, like the ones I mentioned above with excess SIPC coverage, have gone out and made a stated "protection guarantee" claiming they will make a customer whole if there's some fraud that is reported quickly and is no fault of the owner... but there's no government requirement for that, and not all the brokerages offer that.
viewtopic.php?t=355944

[SlowMovingInvestor]

One thing you could do is to hold all your Treasury Securities in a Treasury Direct account. TD accounts have a lot of limitations, so I honestly would not use them for anything except non-marketable securities (savings bonds).

But if one has a large Treasury portfolio, one could move/keep it at TD. No dependence on a broker unless you want to sell prior to maturity.

[AlohaJoe]

3. For those who have a many million dollars, I guess strategies such as #2 above with many brokers. Additionally making joint account seems to double the insurance/coverage? "... SPIC ... covers joint accounts as two individual accounts."

Do you really think someone with $10 million is going to open up 20 brokerage accounts? Can you even name 20 brokers? And $10 million isn't exactly massive amounts of money any more.

[typical.investor]

I don't know if this happens much any more. The SIPC was involved in the Madoff scandal, and apparently the people fleeced by Madoff were disappointed and unhappy with how the SIPC handled things.

When you are promised 12% per year with no deviation and you believe it, I think it is rather expected that disappointment occurs.

Virtually all brokerages do carry some form of private excess insurance that covers holdings above the SIPC limit. I have no idea if it's any good. The SIPC website says:

Excess SIPC insurance is insurance provided by a private insurer and not by SIPC. The insurance is intended to protect brokerage customers against the risk that customers will not recover all of their cash and securities in the proceeding under the Securities Investor Protection Act (SIPA). Under many of these policies, customer eligibility for recovery is not determined until after the SIPA liquidation of the customer’s brokerage firm has concluded and the amount of the customer’s recovery in that proceeding has been established.

It's my understanding that no-one has ever lost money by holding assets at a brokerage which held such insurance. That was as of a few years ago and I don't have the citation handy now.

2. For those who have between $500k and a couple of million, one can keep cash with FDIC insured banks such as BoA, $500k assets in related brokers such as Merrill for BoA etc, and other assets split between a few brokers $500k top (no cash).

I think this fundamentally misunderstands SIPC and how brokerages work.

First, there are regulations that segregate your holdings from the brokerage's. This isn't true of crypto exchanges by the way. And this is important and a main line of protection.

Second, SIPC coverage is meant to protect you when a brokerage has gone bankrupt and your assets are missing. It's entirely possible that your broker goes bankrupt without any assets having gone missing. If they do take from costumers to try and save themselves, the SIPC insurance is meant to make up for the shortfall between what assets of yours are recovered and returned to you.

For example, of the $38 billion in claims relating to the Lehman Brothers Inc. (LBI) liquidation, 100% were returned and no advances from the SIPC Fund were necessary to make LBI customers whole. Thus, the $500k SIPC limit had absolutely no bearing.

You can look at historical numbers and I haven't done so recently but when I did it was in the high 90's. [98.7% (Source: 2011 SIPC Annual Report)] - sorry not going to comb through the reports.

This means that historically (again data is 10 years old), there was a 1.3% unrecovered loss. So if you held more that $38,461,538.46, SIPC wouldn't have covered you fully.

Third, as previously mentioned, brokerages do have additional insurance. The amounts are typically seeming low relative to the assets they need to insure, but again going by average data (again outdated but it's what I have now), the additional insurance would be divided up among those who held more than $38,461,538.46 in assets (again assuming a 98.7% recovery rate) at which point the SIPC $500k protection is exhausted.

Now what about Madoff? Even this obvious Ponzi scheme had an 81.35% recovery rate. As of recently, any customer with an allowed claim of up to $1.65 million was made whole. Other customers with larger allowed claims received 69.85% of the net amounts custodied with the Madoff firm.

What angered Madoff "investors" was that recovery amounts were based on actual contributions and not the exorbitantly fictional amounts Madoff claimed he had made through his fictional trades. And people who had taken "earnings" out had them clawed back. Infuriating, but honestly to be expected I think. In a more normal recovery, the value of your account would include both dividends and capital appreciation of your shares. I don't believe Schwab, Fidelity or Vanguard could get away with widespread taking money and not actually purchasing shares. Someone would absolutely blow the whistle for sure.

[123]

While there seems to be a lot of faith in the SIPC the organization doesn't have a whole lot of funds. Their 2021 annual report https://www.sipc.org/media/annual-repor ... report.pdf indicates they have assets of about $4.4 billion and a line of credit with the treasury for $2.5 billion. In my book that's not a whole lot of money, there are a lot of assets in brokerage accounts that could be at risk.

[typical.investor]

While there seems to be a lot of faith in the SIPC the organization doesn't have a whole lot of funds. Their 2021 annual report https://www.sipc.org/media/annual-repor ... report.pdf indicates they have assets of about $4.4 billion and a line of credit with the treasury for $2.5 billion. In my book that's not a whole lot of money, there are a lot of assets in brokerage accounts that could be at risk.

How much did SIPC pay for the $38 billion in claims relating to the Lehman Brothers Inc. (LBI) liquidation? The numbers I saw stated $0. This is as SIPC covers missing assets and regulations require brokerages to segregate their assets which means they can be simply returned in a bankruptcy and don't require SIPC coverage. Had Lehman stolen customers funds to try and recover, there perhaps would have been a different story. But had they done that, you would hope a Lehman employee would blow the whistle for a well-earned reward before things had gotten too bad or their internal controls would catch a rouge employee.

I put this SIPC criticism in the FUD category. https://www.sipc.org/news-and-media/new ... s/20121005

In addition, what amount would satisfy you? $40B $400B $4T? That money would come from brokerage fees and do what, sit in cash? If SIPC hasn't run out of money so far, why increase the reserves? In what scenario are their funds going to be exhausted?

[nisiprius]

I think I have a definitive answer. SIPC protection is not and should not be called "insurance" (despite the fact that a Google search shows dozens of websites calling it that).

I emailed the SIPC, using their general query email address, asksipc@sipc.org, noting an online exchange in which someone commented that a Merrill website refers to it as "insurance." I wrote:

My belief is that “insurance” has a specific legal meaning and that SIPC protection is not insurance and should not be called “insurance,” by Merrill or anyone else.

I’d appreciate it if you’d clarify this.

I received this response:

You are correct. The protection provided by SIPC under the Securities Investor Protection Act seeks to restore the securities and related cash which customers entrust to their brokerage firms. SIPC can make advances to Trustees of up to $500,000 for each customer with a sublimit of $250,000 for cash. SIPC does not use the term “insurance” in reference to its protection as it is not insurance in the classic sense, nor does it meet the definition of the term in various state statutes.

In addition to any legal requirements associated with the term “insurance,” use of the term may also lead investors to falsely believe that SIPC protection extends to market losses or many types of fraud which do not affect the custody of customer property.​

Also, as noted earlier, their website states

It is important to understand that SIPC is not the securities world equivalent of the Federal Deposit Insurance Corporation (FDIC), which insures depositors of insured banks.

[hameshatumkochaha]

3. For those who have a many million dollars, I guess strategies such as #2 above with many brokers. Additionally making joint account seems to double the insurance/coverage? "... SPIC ... covers joint accounts as two individual accounts."

Do you really think someone with $10 million is going to open up 20 brokerage accounts? Can you even name 20 brokers? And $10 million isn't exactly massive amounts of money any more.

I agree that $10m is not massive, nor would someone with those assets would open 20 accounts. I was simply saying that if one has that much money and is really looking to get that "protection", then that might be something they might consider; but likely such an individual would engage a professional. I just don't know since I am nowhere close to $10m.
In the lighter vein, $10m is not massive amount, certainly for those who have that much.

[kvdecide]

Hello All
A very informative thread indeed!

Hypothetically, if a customer had a million dollars at Vanguard, and if the amount was equally split into brokered CDs with five different banks, does this amount fall under "cash with Vanguard" category?

My understanding is that the entire million dollars is covered under FDIC insurance -- as if the customer held these CDs directly with these five different banks. Is this accurate?

* P.S: Vanguard sells only FDIC insured brokered CDs.

[typical.investor]

Hello All
A very informative thread indeed!

Hypothetically, if a customer had a million dollars at Vanguard, and if the amount was equally split into brokered CDs with five different banks, does this amount fall under "cash with Vanguard" category?

No, CDs are securities and so covered by SIPC.

My understanding is that the entire million dollars is covered under FDIC insurance -- as if the customer held these CDs directly with these five different banks. Is this accurate?

Well the broker’s underlying CDs purchased from the bank are insured (if the CD carried FDIC insurance but not if it's from someplace that didn't). If the broker and banks both went under at the same time, I am not sure if the broker could return the worthless CDs to you (as required) but claim the cash or use it to pay their debts in their own bankruptcy. I somehow doubt it. If the broker were unable to return the CD to you (gone missing), then
that amount would be applied to your $500,000 SIPC protection which again is only designed to cover missing securities -- the primary function of SIPC is to return your actual holdings to you (96% or so historical recovery). And I doubt the broker could claim the FDIC insurance and not pass it along to you if they were solvent. But could the FDIC insurance itself get counted as cash at an insolvent broker if the CD had gone missing and the broker had a claim on the insurance and would be receiving cash? Again I doubt it, and would expect your SIPC protection to include return of the value of the security which would be valued at it's FDIC insurance level. Because that truly would be what you could sell it for if it were in your account and returned to you minus a little for the hassle of a delay.

And remember, both FDIC and SIPC are based on account types. So if you have a ROTH, taxable, inherited IRA, and T-IRA, then you are at $2million for SIPC and $1million per bank for FDIC. For cash at a broker, that'd be $1 million.