When I started investing I had never heard of SIPC Limits or the SIPC for that matter. I put my money in index funds. I Later I reserved a small portion for individual stocks. Back then, my best ideas were Sirius and Activision. Somehow I generated a huge return in under six months with Sirius. This was greater fool theory magic. On the other hand, Activision was held for years and it went nowhere. Dang, I should have held onto that one, but that is a story for another day.
Back then, I understood market risk. I really got to understood market risk during the great recession. I also started to understand business risk. Only later did I start thinking about other risks to our net worth. These thoughts were triggered by the “Great Recession.”
One of those risks I never considered was broker-dealer failures. My first brokerage account was a small company called ShareBuilder, later acquired by Capital One. In hindsight I might not have put the little money I had there, especially during the recession.
Who is the SIPC?
The Securities Investor Protection Corporation is a non-profit member corporation. It is not a government agency or establishment of the US Government. This corporation was created under the Securities Investment Protection Act of 1970. It insures customers accounts from being commingled with broker-dealers losses should the broker-dealer go bankrupt. Bankruptcy is rare, but happens from time to time.
Why Should Investors Care about SIPC Limits?
The SIPC was created back in 1970 after a rough period in the markets. During that time brokerages were merging, being acquired or simply going out of business. We know that history on Wall Street repeats itself. Does this situation sound eerily similar to the panic in 2008? Do you remember watching the news on these transactions?
- Lehman Brothers acquired by Barclays
- Bear Sterns acquired by JP Morgan
- MF Global bankruptcy and acquired by the SEC
There were many more of these “acquisitions” during the Great Recession. The point of this post is to inform you of what is covered for risk mitigation purposes. Every investor has their own tolerance for risk.
Had you been an investor with MF Global after being the 8th largest bankruptcy in history, you would have seen the SIPC step in to protect securities customers.
Billions of dollars were at jeopardy of over 30,000 customer accounts. After two and a half years after the bankruptcy customers learned that they would get all of their money back. Only until February 2016 did investors get a notice from the SIPC that their money would be returned to them.
Five years of investors hard earned capital held up in liquidation proceedings.
This is a tough pill to swallow for investors. Investors minds were finally put to ease after all of this time. Hopefully investors didn’t have their entire net worth tied up in the legal proceedings. We later learned that most of the investors were farmers, hedge funds and individuals.
What Does the SIPC Cover?
The SIPC is similar to the FDIC, except for brokerage accounts. The FDIC insures cash in a bank account up to $250,000. The SIPC insures a brokerage account up to $500,000, including up to $250,000 held in cash. This means if you have an account with $300,000 in cash and $200,000 in Coca Cola stock, you would potentially be uninsured for $50,000 in cash.
Now, if you have three accounts, each with $500,000 for a total of $1,500,000 at a single brokerage you would not have insurance backing for the full amount from the SIPC. They would only insure up to $500,000.
However, if you had one individual account, one joint account with your wife or husband and one custodial account for you child, each account would be insured up to $500,000. Please read the guidance on their website for more details.
Some Broker-Dealers Provide Extra Insurance
For example, one the brokerage accounts we use is with Schwab. They have an additional insurance policy for their customers. This is an added benefit for peace of mind for investors. Of course, if the broker dealer fails who knows how long it would take to recoup your capital. Here is a quote from their website.
“Additional protection from Lloyd’s of London and other London insurers. At Schwab, our customers receive an extra level of coverage. We’ve chosen a program led by Lloyd’s of London, a well-respected name in the insurance industry, as underwriter for additional brokerage insurance. This “excess SIPC” protection of securities and cash is provided up to an aggregate of $600 million, limited to a combined return to any customer from a trustee, SIPC, Lloyd’s, and other London insurers of $150 million, including up to $1,150,000 in cash. This additional protection becomes available in the event that SIPC limits are exhausted and there are no additional funds available from the estate of the failed brokerage firm.”
What Doesn’t the SIPC Cover?
The SIPC does not cover loss of capital on a stock transaction. It also doesn’t cover you if you were provided with bad information from an advisor or broker. It also doesn’t cover certain types of investments like currency, futures contracts or a warrant or right to purchase something. This doesn’t bother me as I tend to steer clear of any of these exotic investments.
While the risk of a broker-dealer failure is rare, would you want all your capital at risk in a single account? I love the simplicity of only having one account. To avoid the pain of logging into many accounts for daily or monthly review, I centralize my accounts using Personal Capital.
Have you ever heard of the SIPC? How do you make sure your investment capital is safe if your accounts exceed the limits?