5

Before posting this question I did read Is SIPC coverage on cash as strong as FDIC?, but the answer did not seem to make much sense/lacked many answers to help clarify for me.

I was doing some reading online, and from what I understand, they are basically the same thing, except one covers bank accounts, the other covers brokerage accounts (with SIPC covering 500,000 in total with 250,000 of it as cash).

I recently opened a brokerage account, and I noticed none of the companies (even big ones) have FDIC insurance. Even if banks have a brokerage, the money you have there would not be covered under the FDIC policy since it is a brokerage account and not a bank account.

It would also seem that since no brokerage has FDIC, that they are all equally at risk unless you put it into a high-interest savings account where you can have the backing of FDIC. I saw on a couple of the firms I looked up in their consumer report that complaints about not having FDIC. But this seems illogical since brokerages won't have FDIC in general.

So this leads me to wonder what the big deal is about not having FDIC if all brokerage accounts (at least the ones I looked at) have SIPC since they seem to cover things equally depending on the account type? Maybe my perception is really off, and I apologize. I am still new to personal finances and trying to learn.

  • For obvious reasons, you don't get airline flight cancellation insurance for a drive across the country, and you don''t get auto rental insurance for a flight across the country. Why then should you expect non-banks to have bank insurance, and banks to have non-bank insurance? – RonJohn Nov 10 '17 at 17:42
  • @RonJohn that's my point though that I am trying to make. Why is it such a big deal to the general public about not having FDIC when they have SIPC? Is there something I am missing that makes SIPC not as good? – ggiaquin16 Nov 10 '17 at 17:43
  • 1
    I never knew there was a big deal in the general public about Vanguard, Fidelity, etc not having bank insurance on their non-bank products. They do, though, partner with banks to store your cash (aka "Core position") and that's covered by the FDIC . – RonJohn Nov 10 '17 at 17:50
  • @RonJohn yes, I did see that even with schwabb they offer something similar. But yes, it's put as a disclaimer on almost every brokerage I saw about not having FDIC, as well as the consumer reports had a good bit of complaints about FDIC or lack of it. It seemed silly. But if they are equally the same, then that's all that matters and it is ultimately what I am asking. If FDIC and SIPC are the same thing but for different account types, then great! – ggiaquin16 Nov 10 '17 at 17:52
  • Are auto rental and airline insurance the same? No. Neither are FDIC and SIPC. So stop saying that they're the same. Having said that... FDIC and SIPC are related in that they both protect your investments, just as auto rental and airline insurance protect you during travel. – RonJohn Nov 10 '17 at 18:01
9

There is a subtle difference.

In an FDIC insured bank account, you are guaranteed to get all of your money back out. If you put $1000 into your bank account, you are guaranteed to be able to get at least $1000 back out when you want. The value of the account (in dollars) can never go down, for any reason.

When you put money into a brokerage account, cash is typically invested in a money market fund. Money market funds are considered very safe investments, with low risk of loss (and a corresponding low rate of return). However, it is possible for the value of a money market fund to go down, and SIPC insurance does not cover that.

What SIPC does cover is any sort of shenanigans that a broker might play on you. If they screw up and delete your account, or give your money to someone else, or close up shop and head to Grand Cayman, SIPC ensures that you will get your money back. But it does not cover investment losses.

  • So, If I have... 50,000 cash in an brokerage account and 40,000 in stock investment, the 40,000 is lost in the event of shenanigans and I only get back the cash value? – ggiaquin16 Nov 10 '17 at 18:04
  • 2
    @ggiaquin No, it protects your entire brokerage account, whether in cash or assets (up to the limits), from theft/brokerage trouble. But it does not cover investment losses. – Ben Miller - Reinstate Monica Nov 10 '17 at 18:09
  • 2
    OH okay that is great to know. I wouldn't expect it to cover loses, that's the risk of investing. Thank you so much for clarifying this. It still leads me to wonder though why a brokerage account would go out of their way to say they are not FDIC insured if it's for banks anyways and why people would complain about that on consumer report. – ggiaquin16 Nov 10 '17 at 18:12
  • 1
    @ggiaquin The reason for the disclaimer is to let you know that your deposit can go down in value. They don't want you to assume that it is like a bank account where you are guaranteed to get back out every penny you put in. – Ben Miller - Reinstate Monica Nov 10 '17 at 18:18
  • 1
    @ggiaquin No, that's not what I mean. Yes, the value of your money can go down due to inflation (even inside an FDIC-insured bank account), if the value of a dollar goes down. But what I'm talking about with a money market fund is the number of dollars you have invested can go down (theoretically). You could put $1000 into a money market fund, and if things go wrong you might only get $995 out. It works differently than a bank account. – Ben Miller - Reinstate Monica Nov 10 '17 at 18:26
1

While you are correct that no broker-dealer ever qualifies for FDIC and it could be sufficient for customers to know that general rule, for broker-dealers located at or 'networked' with a bank -- and nowadays many probably most are -- these explicit statements that non-bank investments are not guaranteed by the bank or FDIC and may lose principal (often stated as 'may lose value') are REQUIRED; see http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9093 .

  • Interesting! I also noticed on my Wells Fargo Brokerage account that it stated it is not FDIC insured. I thought for sure they would hold the cash balance in a bank account instead since it is basically a bank anyways. Stating it as a requirement is an interesting thought. Thanks for bringing that up. – ggiaquin16 Nov 13 '17 at 15:42
  • @ggiaquin: yes if a broker puts your cash in a (US) bank that part, only, is FDIC insured (up to the limit). I also have Wells and page 1 of my statement has "Investments and insurance products are: (box) NOT FDIC-INSURED (box) NO BANK GUARANTEE (box) MAY LOSE VALUE" (applying to all investment products generally) but page 4 under "Cash and Sweep Balances" has "held at Wells Fargo Bank NA and (if amounts exceed $250,000) one or more other Wells Fargo affiliated banks ... not covered by SIPC, but are instead eligible for FDIC insurance ...." – dave_thompson_085 Nov 14 '17 at 2:33
0

There is one way in which FDIC and SIPC are not equivalent as far as I could get a Fidelity counter rep not to answer but to carefully dodge.

Question: Unlike a bank, which can't touch my principal or earned interest below the $100k protection level, can a brokerage money market fund in a financial crisis situation invoke negative interest against my SIPC balance (i.e., take my money to hedge against its meltdown) against which I am not protected? Answer: Well, that would never happen; for interest rates to be negative things would have to be very bad.

Indeed they would, imagine that. Not a reason not to trust SIPC, just a reason to know to trust it less in a very bad situation.

0

Some brokerages do offer a service called "bank sweeps", which move your uninvested cash deposits into an FDIC-insured account at a partner bank (or several banks, to increase the insured amount).

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.