Clients often ask us how to ensure that their assets are “safe”.  The answer to this question lies in understanding the difference between FDIC insurance for bank accounts and SIPC protections for brokerage accounts.

What does FDIC protection mean, and how are bank assets protected against bank failure?

Through the Federal Deposit Insurance Corporation (FDIC), an independent agency, the U.S. government provides deposit insurance to consumers in order “to maintain stability and public confidence in the nation’s financial system.”  This protection is for funds deposited in an FDIC-insured bank account in the event of a failure of the bank at which the account is held.  This FDIC insurance is capped at $250,000 per consumer for each type of account at a banking institution.  For example, if you have an individual account and a joint account at a bank, you are eligible for FDIC insurance equal to $250,000 per account.  The FDIC offers a calculator that you can use to calculate the insurance coverage of your accounts.

How are brokerage assets protected against the failure of the custodian who holds these assets?

Brokerage firms, unlike banks, are required to segregate each client’s assets in their accounts from the firm’s assets.  If a brokerage firm fails, your assets would still be segregated from the firm’s creditors.  This is the first layer of protection offered to consumers by brokerage firms.

Assets in brokerage accounts are not eligible for FDIC insurance (some exceptions apply, i.e., FDIC insured Certificates of Deposit which are held within brokerage account and cash-management accounts).  Assets held in accounts at brokerage firms (aka custodians), such as Fidelity or Schwab, are also protected against the failure of the brokerage firm by the Securities Investors Protection Corporation (SIPC), which is a not-for-profit organization.  The SIPC provides up to $500,000 of coverage per account per consumer (of which $250,000 in cash is covered).  In addition, brokerage firms purchase excess insurance coverage for their customer’s assets.  For example, Fidelity has excess insurance coverage for up to $1 billion in assets and up to $1.9 million in cash per consumer, and Schwab has excess insurance coverage for up to $600 million in assets and up to $150 million per customer of which $1.15 million can be in cash. SIPC protection does not protect against losses due to market fluctuations or declines.

Another way to view the difference between a bank and a brokerage firm is to consider the following:

• Any deposits that you make to a bank are listed on the bank’s balance sheet – both as an asset to the bank and as a liability to the depositor.  Banks can lend money to third parties based on the value of your assets on the bank’s balance sheet; whereas,
• Any assets that you hold at a brokerage firm are separate from the firm’s assets. The brokerage firm cannot borrow from a third party based on the value of your assets.

Reach out to your advisor if you have concerns or would like additional information.