To be clear, this doesn’t cover investment losses — only you can save yourself from losing a fortune on that hot penny stock tip your college roommate’s mother-in-law heard about from her plumber. Market fluctuations are never covered; only missing assets are eligible if they haven’t been properly segregated. The most common types of eligible securities would be cash, stocks, and bonds, while alternative investment classes such as futures contracts, annuity contracts, currencies, and limited partnerships, among others, don’t qualify. Occasionally, though, other efforts can claw back assets even in those categories. For instance, with MF Global, SIPC President Stephen Harbeck noted that it was able to make arrangements that would be likely to “allow for the return of 100 percent of allowed securities customers claims [and] will also result in significant distributions to be made to commodities customers” whose investments weren’t eligible for SIPC protection.
I used to tell clients that there are multiple lines of defense for their assets. The first and foremost is the segregation requirement, which is the fundamental foundation of account safety. If a brokerage firm is properly segregating client assets and in compliance with federal regulation, there’s nothing to worry about even if the brokerage goes under. Only if the broker fails and the firm has been misappropriating funds in excess of SIPC coverage are you at risk.
Simply put: A firm must have been stealing an awful lot of money from you. We’re talking about Madoff and MF Global type scenarios here. This is why 99% of eligible investors in SIPC cases have been made completely whole over the past 42 years. That’s why you never hear of a “run on the brokerage.”
Many brokers even purchase excess insurance beyond the SIPC’s limits, even though it’s extremely unlikely for those limits to be hit in the first place. For example, Schwab, TD AMERITRADE (NYSE:AMTD) , E*TRADE , and Fidelity all offer excess coverage from Lloyd’s of London and London Insurers. Charles Schwab Corp (NYSE:SCHW), AMERITRADE, and E TRADE Financial Corporation (NASDAQ:ETFC) offer aggregate protection up to $150 million per customer, including SIPC limits, while Fidelity has no dollar limit on the coverage of securities.
If you ever win the lottery, don’t stick it in your checking account; put it in a brokerage account. Even if you’re not investing it, those dollars can sit idle in safety.
The article The Single Biggest Misconception About Your Brokerage and Bank Accounts originally appeared on Fool.com is written by Evan Niu, CFA.
Fool contributor Evan Niu, CFA, has no position in any stocks mentioned. The Motley Fool recommends TD AMERITRADE.
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