Understanding Bank and Brokerage Account Insurance
A common question we get is if there is FDIC insurance on our investment accounts. While a great question, it usually leads to confusion to realize that bank deposit accounts and brokerage accounts are very different, especially once you consider how the various financial institutions work to begin with.
Most people are familiar with FDIC insurance, which covers the majority of your typical banking accounts. The Federal Deposit Insurance Corporation (FDIC) is a federal agency that was established to protect customers from the loss of deposit accounts such as checking and saving accounts at an FDIC-protected bank. The agency was established to help give credibility to the banking industry and protect against bank runs.
It used to be considered risky to keep your money at a bank. Banks make money by lending out portions of your deposits as loans and collect interest. If too many loans defaulted or too many requested their deposits back at the same time, there was a chance a bank would fail and that savers would lose their deposits. The FDIC was formed to help protect individuals and families against this risk and create trust in banks.
The basic FDIC limit is $250,000 per account holder per bank that is covered by FDIC insurance. This would mean a joint account would be covered to up to $500,000 if that bank failed. FDIC insured accounts make perfect sense for your short-term cash and any emergency funds you want to set aside.
It is important to note that FDIC insurance does not cover invested funds even if the investments are made at an FDIC insured bank. This can include stocks, bonds, mutual funds, exchange-traded funds, insurance policies, annuities, etc.
Brokerage accounts are covered by a different entity known as the Securities Investor Protection Corporation (SIPC). The SIPC is a non-profit membership corporation created in 1970 by federal statute. The SIPC is responsible for helping individuals and families recover their assets in the rare instance of a brokerage firm failing. A reason brokerage firms rarely fail is that their main business is not lending out funds like a bank. Instead, they charge a commission for transactions, which is a significantly different business model.
The SIPC protects customers of affiliated brokerage firms up to $500,000 per customer, including a maximum of $250,000 for uninvested cash in the account. This dollar amount is only applicable if the SIPC is unable to recover the assets. It should be noted that this does not protect investors from investment losses. A simple example would be if you own ten shares of Apple stock, the SIPC will make sure you still have ten shares of Apple stock regardless if the price has gone up or down.
Some brokerage firms such as Charles Schwab go above and beyond the SIPC limits. Schwab has extended their coverage through Lloyd’s of London in case the SIPC’s funds are exhausted. As part of their coverage, they protect cash in the account to a little over a million dollars.
The information on this blog is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner, or investment manager.