Insurance coverage for VG accounts

[wanaberetiree]

Is it worth consideration/concern an amount of insurance coverage by a brokerage company, Vanguard or Schwab for example?

What people think about an idea to centralize all accounts in one place, but total maybe ~1.5 M?

Here is a VG language on this topic:

"SIPC protects securities customers of its members up to $500,000 including $250,000 for claims for cash. To obtain information about SIPC, including an explanatory SIPC brochure, please contact SIPC at
SIPC - Securities Investor Protection Corporation or 202-371-8300.

To offer greater protection and security, Vanguard Marketing Corporation has secured additional coverage from certain insurers at Lloyd's of London
and London Company Insurer(s) for eligible customers with an aggregate limit of $250 million, incorporating a customer limit of $49.5 million for
securities and $1.9 million for cash. Coverage provided by SIPC and certain Lloyd's of London and London Company Insurer(s) does not protect against loss of market value of securities. The policy provided by certain Lloyd's of London and London Company Insurer(s) is subject to its own terms and conditions."

Regards

 

[tightasadrum]

I divide it up somewhat, although not very evenly. I did it mostly to have better access to both companies, but also to diversify risk somewhat. Frankly, I never considered the insurance angle, but it's a good question. Maybe, using the $250K/$500K limits, it would be prudent to hold the amount in any one company somewhere near the upper limit.

 

[GrayHare]

What event would it take for a brokerage like VG to be unable to pay you? Would that event, or the resulting massive liability, also overwhelm the insurer? I don't like putting all my nest eggs in one basket, so split them among more than one broker.

 

[wanaberetiree]

I don't know what event, but why then they even have insurance?!

 

[growing_older]

That insurance sounds fairly useless. If it covers for $250 million in aggregate with a limit of $49 million for each customer, the first 5 biggest customers take their 50 million each and the rest have $0.

 

[ERD50]

That insurance sounds fairly useless. If it covers for $250 million in aggregate with a limit of $49 million for each customer, the first 5 biggest customers take their 50 million each and the rest have $0.

Back when many financial places were having trouble, I asked my broker about how that extended coverage would get split up. As you say, it sounds like a lot of money, but I have no idea how much they would actually need if something bad happened. Where am I in line?

He said legally he could't tell me anything more than what was in their disclosure docs. I suppose, but I wonder if I would have said, OK, I'm closing one of my two accounts then, if they would have come up with something?

My concern at the time was I was selling cash-covered puts, so I had cash sitting there. I decided to go ahead, buy the underlying and sell calls (basically the same thing). But I felt better with an entry saying I owned X shares of SPY, than I did with an entry saying I held $XXX in their cash account beyond FDIC limits.

-ERD50

 

[wanaberetiree]

Thank you all for answers!
I am surprised to see not too many people concerned about this.

Maybe I am wrong worrying about this and it's an insignificant detail...

 

[Katsmeow]

Thank you all for answers!
I am surprised to see not too many people concerned about this.

Maybe I am wrong worrying about this and it's an insignificant detail...

I think it is a legitimate point. The thing to consider is the nature of the type of claim that could be made. If the claim is specific to you or a small group of account holders then the insurance is probably sufficient.

The real issue comes up with something that would be pervasive and be a claim that other account holders would also have so that the insurance is exhausted without their being enough to pay all claims.

I know when I saw this come up before it was pointed out that each fund is a separate fund and is separate from other funds. So if there was a problem with Fund A that wouldn't affect any money you or anyone else had in Fund B. And I agree that is helpful. So, if someone for example embezzled everything in Fund A then if you had other funds in Fund B those funds would not be jeopardized (an argument perhaps for not putting all your money in one fund...)

That said...the scariest risk is that you send money to Vanguard (or Fidelity or whoever) and they have this nice web site that says the money is there and you get confirmations and you think you have $X in Wellesley and $Y in the total stock fund and $Z in a bond fund, etc. But....how do you really know that you do? Maybe when you sent that money in, someone took the money and invested it elsewhere or stole it or borrowed it. And maybe this happened to a lot of depositors and there really is nothing there and it is a house of cards and someday it all falls down and there are massive claims made which far exceed the amount of insurance.

Now, truthfully, I think it is extremely unlikely that such a thing will happen with a large company like Vanguard or Fidelity, etc. You see that thing much more typically in investments with smaller outfits.

In our case we have split between Vanguard and Fidelity. We have more in Vanguard but haven't put quite all the eggs there.