It is not uncommon for the financial world to feel turbulent at times. You’ve probably read headlines about bank seizures and bailouts, such as the FDIC’s takeover of banks and Credit Suisse’s multi-billion dollar rescue. Understandably, this would raise concerns about the safety of our investments. You might wonder what these events mean if you have your money in a bank or invested through a brokerage firm. Hopefully, this post will clear up those concerns.
Understanding the Current Market Dynamics
Over the last several years, we’ve witnessed several significant events. Silicon Valley Bank, for example, collapsed in 2023, while Credit Suisse, an institution with over 160 years of history, received a $54 billion government lifeline in the same year. More recently, Pulaski Savings Bank failed in 2025, causing the Deposit Insurance Fund $28.5 million in losses.
Whenever these types of situations occur, they trigger anxieties and prompt individuals to question the security of their funds. In uncertain times, however, such reactions are natural. These fears can be amplified by rumor and speculation. So, to protect your investments, you must separate fact from fiction.
FDIC Insurance: A Safety Net for Bank Deposits
Let’s first address bank deposits and the Federal Deposit Insurance Corporation (FDIC) role. The FDIC is an independent agency that insures bank and savings association deposits. Although bank failures aren’t common, they still occur. The FDIC also maintains a list of failed banks.
With FDIC (Federal Deposit Insurance Corporation) insurance, you can rest assured that your money is safe in your bank. Your deposits are protected by this government agency up to $250,000 per depositor, per insured bank. If you stay within that limit, the FDIC will protect your money if your bank fails. This coverage applies to various deposit accounts, including savings accounts, checking accounts, and certificates of deposit (CDs).
Increasing FDIC protection can be improved by spreading your money across multiple accounts or allowing joint account holders to do so. The coverage limit varies from account to account and from account holder to account holder. For example, there are often separate coverage limits for retirement accounts and trust accounts.
Despite FDIC insurance, there is a delay in accessing funds after a bank failure. Paperwork will be involved, claims must be filed, and some waiting time will be required. The collapse of Silicon Valley Bank in 2023 demonstrated this process, reminding us that while safety nets are there, they do not guarantee immediate access to cash.
SIPC: Protecting Your Investments
Now, let’s turn our attention to investments held through brokerage firms. Unlike bank deposits, FDIC insurance does not cover investments in stocks, bonds, and mutual funds. Instead, they are typically protected by the non-profit Securities Investor Protection Corporation (SIPC). That means through a brokerage firm like Charles Schwab, Fidelity, or Robinhood, your stock, bond, or mutual fund investments may be covered by SIPC.
A SIPC-member brokerage firm protects customers against losing cash and securities (such as stocks and bonds). There is a coverage limit of $500,000, which includes a cash limit of $250,000. So, if your brokerage firm fails, SIPC can help recover your assets up to a maximum of $500,000.
Despite its name, SIPC does not protect against losses caused
by market fluctuations. The SIPC does not cover losses incurred when stocks decline in value, or mutual funds underperform. The purpose of SIPC is to protect you against losses caused by a broker’s failure, not investment risk.
Key Distinction: Custody of Assets
The most important thing to know about SIPC is that it protects you against failure of the brokerage firm, not against losses in your investments. SIPC does not cover you if you invest in a stock whose value declines or an ETF that performs poorly. The SIPC protects your assets if the company holding them fails.
A key concept in understanding SIPC protection is “custody.” In other words, brokerage firms serve as custodians of your money. Their responsibility is to hold your investments on your behalf, but they do not own them. When you purchase stocks, bonds, or other securities, you remain the owner of them. This is an important distinction.
Bernie Madoff is an infamous example that illustrates this point. In Madoff’s scheme, he directly held (or claimed to hold) his clients’ assets. This was a major red flag since reputable brokerage firms typically use third-party custodians to hold client assets.
The Role of Custodians
What’s more, assets you invest through a broker or a financial advisor are generally held by a custodian, a separate entity that safeguards securities. As a result, you are protected on top of that. Custodians hold and manage assets to ensure they are safe and properly accounted for. They do not make investment decisions.
Understanding who the custodian is is critical when depositing money with a brokerage firm. In most cases, checks are not made payable to advisors or firms but to custodians. This is a standard practice and ensures the assets are protected.
Banks vs. Brokerage Firms: A Key Difference
When investing in stocks and bonds, it is essential to distinguish between depositing funds in a bank and buying them through a brokerage firm. Essentially, you are lending money to the bank when you deposit it. After receiving those funds, the bank invests them in loans and other investments, hoping to earn a profit. While they pay you interest on your deposit, they use your money to run their operations.
Contrary to this, when you invest through a brokerage firm, you are not lending them your money. You are giving instructions on how your money should be invested on your behalf. As an intermediary, the brokerage firm executes your trades and holds your assets. Without your explicit consent, they cannot use your money.
Navigating the Complexities
It is not uncommon for brokerage firms to have affiliated banks as well. This can sometimes lead to confusion about which entity holds your funds and which regulations apply (FDIC or SIPC). To understand how these institutions work, you must understand the difference between their brokerage arm and their banking arm. Typically, FDIC insurance protects bank deposits, whereas SIPC insurance protects brokerage investments.
Often, brokerage firms offer “sweep accounts” or “money market funds” where uninvested cash is held. It is important to determine whether these funds are held in a bank account (FDIC-insured) or a money market fund (possibly protected by SIPC). You can usually find this information on your account statement or by contacting your brokerage firm.
Diversification and Due Diligence
As the financial world becomes increasingly complicated, it makes sense to diversify your holdings across different asset classes and institutions. While consolidating all your accounts may seem simpler, having accounts at multiple banks and brokerage firms can provide additional protection.
In today’s digital age, managing multiple accounts has never been easier. With financial aggregation tools, you can view all your accounts at different institutions in one place.
Take Control of Your Financial Future
Due to recent events, it is important to understand your investments and protection options. Examine your account statements, identify where your cash is held, and know the difference between FDIC and SIPC protection. Feel free to contact your financial advisor or the relevant institutions directly if you have any questions. By following these steps, you can ensure the safety and peace of mind of your financial future.
FAQs
What if my investments are worth more than the SIPC coverage limit?
Even though SIPC provides a safety net, you may lose more than the coverage limits. To spread the risk, diversify your investments across several brokerage firms.
How long does it take to recover my investments if my broker fails?
Recovery times vary depending on the complexity of the situation. SIPC could take weeks or months to return assets.
What if my broker acted fraudulently or engaged in unauthorized trading?
In general, SIPC protection covers losses from broker failure, including losses from fraud or unauthorized trading. Nevertheless, the SIPC guidelines may have limitations or exceptions, so reading them carefully is important.
Can I avoid the risk of broker failure altogether?
Although you can’t completely eliminate risk, you can minimize it by choosing reputable and financially stable brokerage firms. Before investing with a company, research its background, financial health, and customer reviews.
What if my broker fails due to a cyberattack or data breach?
In most cases, SIPC protection covers losses due to broker failure, regardless of the reason. You should, however, put in place strong cybersecurity measures to protect your accounts and personal information.
Should I worry if another company acquires my broker?
Mergers and acquisitions are common in the financial industry. Your investments should remain safe during such transitions. However, keep an eye on the changes and ensure your account is transferred correctly.
Featured Image Credit: Photo by Brett Jordan; Pexels
