Most people know that the FDIC insures bank accounts up to $250,000. But did you know that brokerage firms registered with the SEC almost always have protections as well?
An organization called SIPC — Securities Investor Protection Corporation — exists to backstop the securities and cash in your brokerage account up to $500,000. I’ll get into what the SIPC is and what it protects in more detail later in this article.
But considering that $500,000 limit, should you spread your assets between multiple brokerage firms if you hold more than $500,000 in investments?
That’s what a listener of the Clark Howard Podcast recently asked.
Should I Only Invest $500,000 in Any Brokerage Firm To Maintain SIPC Protection?
Am I in danger of losing my assets if I invest more than $500,000 through a single investment company?
That’s what a Clark listener wanted to know on the Jan. 12 podcast episode.
Gina in Ohio asked: “How dangerous is it to keep one million dollars in one brokerage account if most of the money is invested in ETFs and treasuries? Would you recommend using two different brokerage firms and investing $500,000 in each just in case one of them goes bankrupt?”
It’s “fantastic” that you have $1 million invested, Clark says. But even though SIPC exists, it isn’t your first and only shot at recouping your assets should your brokerage go bust.
“Even in the failure of a brokerage, your holdings are moved to another brokerage firm. The only time that your money is at risk is with flat-out theft that would be internal to the brokerage,” Clark says. “And so I would not worry about a brokerage failure meaning your money is at risk.”
What Is the SIPC?
The SIPC is a nonprofit that materialized as part of the Securities Investor Protection Act of 1970. It protects investment accounts from insolvent brokerages.
The SIPC isn’t a federal agency like the FDIC. It also doesn’t protect against a loss of value if your investments go down in price.
However, it offers up to $250,000 worth of protection of uninvested cash inside your brokerage account and $500,000 total including assets such as stocks, bonds, mutual funds and ETFs.
Also, if you have an IRA and a taxable investment account at the same company, the SIPC treats those as separate accounts, each with $500,000 of protection.
“Virtually all broker-dealers registered with the Securities and Exchange Commission (SEC) are SIPC members,” the SIPC website says. “Those few that are not must disclose this fact to their customers.”
What Happens If Your Investment Company Implodes?
It’s scary to think about your life’s work — and the money on which you’ll rely in retirement — disappearing from your financial accounts just because a brokerage firm fails.
However, it’s extremely unlikely that a major brokerage firm will go out of business. The financial industry, especially investment companies, is highly regulated.
Even if your investment company goes out of business, you shouldn’t need the SIPC to swoop down and save the day.
Says FINRA: “In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm.
“Multiple layers of protection safeguard investor assets. For example, registered brokerage firms must keep their customers’ securities and cash segregated from their own so that, even if a firm fails, its customers’ assets will be safe. Brokerage firms are also required to meet minimum net capital requirements to reduce the likelihood of insolvency.”
Paying Too Much in Fees Likely Poses a Bigger Risk Than Your Investment Company Collapsing
However, it may not be the best idea to keep more than $250,000 in cash at a specific brokerage firm. “But when your money’s fully invested, you do not have a risk,” Clark says.
Beyond that, investing through a company that charges you high or even moderate fees is much more likely to impact your long-term wealth.
Getting charged fractions of a percent more for the right to invest may not seem as threatening as your investment company totally collapsing. Driving a car may not seem as scary as swimming in shark-infested waters, either. Yet history shows us that it’s one of the most dangerous and deadly activities, just like paying too much in fees.
It’s great that SIPC protection exists to the tune of $500,000 per account. But that’s more of a last line of defense in case your investment company becomes insolvent (extremely unlikely) and your assets don’t get transferred to another brokerage (extremely unlikely).
It’s OK to invest more than $500,000 through a good investment company.
Just make sure that you pick a company that offers low fees.