Brokerage Account Limits & Protection

[DawgMan]

I plan on updating my Will and Estate planning by the end of the year (it's been a good 20 yrs and kids are all legal age now) and I as I start to look at the items that may need to be addressed, it dawned on me to ask the question about brokerage account sizes and what is really protected. From what I understand, SIPC covers up to $500k per acct and maybe Lloyds of London might get you coverage to around $1m? I hold all my $ at Schwaab and have multiple accounts which exceed these limits. Is it really prudent to start breaking up these accounts into multiple accounts less than $500k? Sure seems like a pain in the a$$. Thoughts?

FYI... I'm still 3 yrs or so from launching me RE so still packing away new dough in these accounts (taxable & tax deferred)

 

[Onward]

I believe SIPC protects $500k in securities and $250k in cash. (Haven't double-checked this.)

If it were me, I would spread $$ among brokers according to that limit, despite inconvenience. If Lehman can fall, so could Schwab.

 

[gauss]

Another reason IMHO not to convert your Vanguard mutual fund account into a brokerage account until it is requirement to maintain funds at Vanguard.

-gauss

 

[DawgMan]

I have a call into a Schwab adviser to get their take. So are you telling me the population with more significant net worth is sitting with 10 - 20 different accounts? Seems like there has to be a better way other than buying your own insurance at some place like Lloyd's.

 

[Dd852]

Vanguard has bought additional protection for its clients above and way beyond SIPC. Details here. https://investor.vanguard.com/investing/account-protection

 

[MBSC]

You may be interested in this blog post.

Your assets, for examples shares of Apple stock or an S&P 500 mutual fund, are required by federal law to be held separately from the broker’s assets at all times. Thus, in the vast majority of cases, there are no missing securities and the primary role of the SIPC is to oversee the transition of assets from the failed brokerage firm to another solvent firm. If there are missing assets, then the SIPC will cover $500,000 of missing assets ($250,000 maximum for missing cash), per legal entity.

The following would qualify as separate legal entities, each subject to the $500,000 limit: your individual account, your trust, your IRA, your spouse’s individual account, trust and IRA, your joint account, as well as a custodial account for a child.

Example of meeting and/or exceeding SIPC limits. So for example, you could have $2 million of non-cash assets at a failed firm in a single taxable account. If 75% of assets are recovered from the failed firm, you get $1.5 million back from the firm and $500,000 from the SIPC. If only 50% of the assets are recovered, that’s $1 million back from the firm, $500,000 from SIPC, and you’d be out $500,000 unless there are additional recoveries in the future. Again, a recovery rate as low as 50% is highly unlikely based on historical failures. Per the SIPC annual report, the average recovery rate for insolvencies is 99%. Most examples that I’ve seen use a 90% recovery rate as a conservative example.

VMC [Vanguard Marketing Corporation] has secured additional coverage for your account, which applies in excess of SIPC, through 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 $1.75 million for cash.

Note the total aggregate limit of $250 million, though. Last time I checked Vanguard mutual funds had over $3 trillion in assets under management. Of course, most of those assets are not held in Vanguard Brokerage Services (but in institutional funds and other mutual fund accounts outside of VBS). Still, $250 million across all of their accounts doesn’t seem like very much. A few big fish with $50 million accounts and most of that would already be used up.

Reference: Exceeding $500,000 SIPC Insurance Limit at Vanguard (or any Brokerage) — My Money Blog

 

[bingybear]

I plan on updating my Will and Estate planning by the end of the year (it's been a good 20 yrs and kids are all legal age now) and I as I start to look at the items that may need to be addressed, it dawned on me to ask the question about brokerage account sizes and what is really protected. From what I understand, SIPC covers up to $500k per acct and maybe Lloyds of London might get you coverage to around $1m? I hold all my $ at Schwaab and have multiple accounts which exceed these limits. Is it really prudent to start breaking up these accounts into multiple accounts less than $500k? Sure seems like a pain in the a$$. Thoughts?

FYI... I'm still 3 yrs or so from launching me RE so still packing away new dough in these accounts (taxable & tax deferred)

During 2008/9 Schwab lost their excess SIPC insurance. I remember it well. I did split up out accounts. Like FDIC, it is per account registration. If you hold two accounts under the same registration, you don't get more protection. The same registration would be like 2 after tax accounts in your name individually. Fidelity and several others grouped together to "cover the group". Not sure this would have worked if claims really came in.

As I recall the need for SIPC really depends on how assets are held. If they are held by the broker for your benefit, these could be at risk if the broker becomes insolvent. In your name directly, not so much.

Look up what SIPC covers. I don't this it covers fraud or criminal activity. It does not cover market losses.
In 2008 I did split up accounts between two houses. It ended up not being necessary. Look at the stability of the brokerage. Schwab, Fidelity, Vanguard ... all probably fine. Some smaller ones even today having some issues. I think E-trade may have been having some issues if I recall.

 

[euro]

Bingy, can you elaborate on this? Do you mean for example that if you hold the account as a trustee (on behalf of your family trust), then you may be out of luck? Why would that be any different from a personal account? You have me concerned

 

[GalaxyBoy]

Answers to this and many other questions are on the SIPC website - SIPC - Securities Investor Protection Corporation .

Regarding multiple accounts, this link says,

SIPC protection of customers with multiple accounts is determined by "separate capacity." Each separate capacity is protected up to $500,000 for securities and cash (including a $250,000 limit for cash only). Accounts held in the same capacity are combined for purposes of the SIPC protection limits.

Examples of separate capacities are:

individual account;
joint account;
an account for a corporation;
an account for a trust created under state law;
an individual retirement account;
a Roth individual retirement account;
an account held by an executor for an estate; and
an account held by a guardian for a ward or minor.
Additional information on separate accounts may be found in SIPC's Series 100 Rules.

The following are examples of separate accounts:

Mary has an account in her name at her brokerage firm. Mary is protected by SIPC up to $500,000.
Joe has two brokerage accounts, each in his own name. For purposes of SIPC protection, Joe’s accounts are combined, and Joe is protected by SIPC only up to a total of $500,000.
Joe and Mary are married and they have a joint brokerage account which is separate from the individual accounts that they each have at the firm. An additional maximum of $500,000 of SIPC protection is available for the joint account.
Joe has a Roth account and an IRA account, at the same brokerage. Joe is protected up to $500,000 for the Roth account and up to $500,000 for his IRA account.

 

[bingybear]

Bingy, can you elaborate on this? Do you mean for example that if you hold the account as a trustee (on behalf of your family trust), then you may be out of luck? Why would that be any different from a personal account? You have me concerned

no, if I recall would be another account registration and would allow separate SIPC coverage from that of the individual in their individual account.

If I recall, there were news articles when MF Global went bust on how/if all the clients would get their shares/$ back thru SIPC coverage. I don't know how it ended up.
I was referring to the broker holding your shares in the broker name, not yours (or your trust's name)

 

[braumeister]

You may be interested in this blog post.

VMC [Vanguard Marketing Corporation] has secured additional coverage for your account, which applies in excess of SIPC, through certain insurers at Lloyd’s of London and London Company Insurer(s) for eligible customers with an aggregate limit of $250 million...

FWIW, Fidelity has a similar excess insurance, with a higher aggregate of $1 billion.

Still, spread over all their accounts, it doesn't seem like much.

Doesn't worry me though. The big houses are safe enough.

 

[gauss]

aggregate limits

I am not sure how far that Lloyds policy will go if the $250M limit applies to the sum of the claims of all Vanguard customers.

Seems more of a marketing ploy rather than a true hedge against a major fraud (ie Madoff level).

-gauss