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The uncertainty in the banking industry has caused some investors to also question the safety of their brokerage and custodial accounts.
Banking assets are protected by the Federal Deposit Insurance Corporation (FDIC), while brokerage assets are comparably protected by the Securities Investor Protection Corporation (SIPC). SIPC’s coverage limits are twice as high as the FDIC’s—up to $500,000 per securities account type. So if a person has a traditional IRA, a Roth IRA and a taxable account at a custodian like Schwab, Fidelity, TD Ameritrade or Pershing, each would be protected up to $500,000. Similarly, if a married couple each has an individual account, plus a joint account, all three accounts would be insured for up to $500,000 through SIPC. In addition, the major brokerages have excess SIPC coverage that extends the coverage well beyond the $500,000 per account type.
When does the protection kick in? If a custodian becomes insolvent, then SIPC will ask the court system to appoint a trustee to liquidate the firm. In most cases, however, investors will recoup their investments because the government will broker the sale of the custodian or broker-dealer to another party, which will take over custody of the accounts and render them secure again. In addition, brokerage firms are required to keep customer funds in accounts separate from their own, which serves as a backup check and balance against insolvency losses. SIPC, along with the excess coverage insurers, are the guarantors of last resort.
Note that SIPC insurance doesn’t provide protection against investment losses.
Article adapted with permission of financial columnist, Bob Veres.
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