Financial security and resilience are essential parts of a healthy financial plan. One critical aspect of achieving this security is understanding the different types of insurance available to protect your financial assets. In light of these recent bank failures, you’ve likely seen us talking about Federal Deposit Insurance Corporation (FDIC) insurance, the US government-backed insurance that protects up to $250k of cash in the event of a bank default.
Another type of insurance commonly used in the United States is SIPC insurance. In this blog post, we will take a closer look at what SIPC insurance is, how it compares to FDIC insurance, and why it’s important for your financial resiliency.
What is SIPC insurance?
SIPC insurance is short for Securities Investor Protection Corporation insurance. It’s a form of insurance that protects investors in the United States in the event of broker-dealer failure and there is a loss of client assets. The Securities Investor Protection Corporation was created by Congress in 1970 and provides protection for brokerage accounts held at member firms. If the broker-dealer fails, SIPC will step in and return cash, securities, and other assets up to a certain amount to the investors.
How does SIPC insurance work?
It’s pretty rare that you would ever need SIPC insurance to kick in for your investments. First, you have a baseline level of protection under the law. The Segregation of Client Assets regulation ensures your investment assets are never commingled with the broker’s assets. This means your investment securities are always safely held in your name at your custodian bank separately from the broker-dealer. (In our case, Pershing LLC holds the securities, and Shareholders Service Group (SSG) is the broker-dealer.) In the event that somehow the broker-dealer moves client assets outside of client accounts and then at the same time fails, SIPC will step in to begin liquidating the broker-dealer firm’s assets and restore any lost assets to the clients, up to the limit of $500,000, including a $250,000 limit for cash. If you’re a client of ours, you are covered by SIPC insurance with our broker, Shareholders Service Group. Shareholders Service Group also has an additional $1 billion of coverage through Lloyd’s of London as a back up to SIPC. And here’s a brochure with more information on how SIPC works.
How does SIPC insurance compare to FDIC insurance?
The FDIC was created in 1933, and it insures deposits at banks and savings associations. It protects depositors in the United States in the event of a bank failure up to $250,000 per depositor, per insured bank. Note the limitation, which is why we recommend to our clients with more cash on hand to split their money between banks.
The critical difference between FDIC and SIPC is the types of assets that are covered. FDIC insurance only covers deposits held in a bank, while SIPC insurance only covers securities held in a brokerage account. For example, if you have a savings account at a bank and a brokerage account at a brokerage firm, both accounts would be covered, but separately, by FDIC and SIPC respectively. It’s important to note that both SIPC and FDIC insurance are backed by the US government, which provides an added layer of security.
Why is it important for your financial resiliency?
In today’s ever-changing financial landscape, it’s essential to protect your investments and assets from unexpected events such as broker-dealer or bank failures. Understanding the types of insurance available to you and whether your financial institutions are covered by them (not all institutions are!) is a critical way we check the resiliency of any financial plan. Having SIPC insurance, along with FDIC insurance, can provide you with peace of mind and protect you from financial losses due to unforeseen circumstances. SIPC insurance is especially important given that many people’s brokerage accounts serve as the long-term investments that make up a large portion or majority of their financial nest egg.
So, if you have investments in a brokerage account or deposits in a bank, it’s important to ensure that they are covered by SIPC or FDIC insurance. Thinking Big clients can rest assured that this is part of our process on the back end of our financial planning work. We regularly keep an eye on this and reach out to clients if we see that a bank or brokerage account might not be covered. If you’re wondering if you’re covered, you can check with your brokerage or bank to confirm their membership in these organizations, and it’s most often displayed front and center on their websites.
Brandon Tacconelli is the Director of Client Care at Thinking Big Financial, Inc. Thinking Big is a fee-only financial planning firm in New York City specializing in working with the LGBTQ+ Community.