SIPC insurance?

[Running_Man]

I think subsequent illogical questions can appropriately be met by the "tinfoil" or "meteor deflector" words to try to jolt the questioner out of their rut. (No disrespect intended to those who are already wearing tinfoil hats while designing their deflectors.) If a questioner can't use those comments for self-examination without getting their feelings hurt then they should probably find another Internet discussion board.

I do not understand how another poster agreeing with the original poster is being disrespectful to another who a different point of view. Has absolute consensus of such importance to your state of mind that those with opposing views are to be either corralled back to the herd or expelled from the ranch? That to me appears to be the point of your post.

 

[bpp]

nm

 

[brewer12345]

I do not understand how another poster agreeing with the original poster is being disrespectful to another who a different point of view. Has absolute consensus of such importance to your state of mind that those with opposing views are to be either corralled back to the herd or expelled from the ranch? That to me appears to be the point of your post.

And you seem to be desparate for us to agree with you. Careful, or I will repeat the thing about the goats...

If it makes you feel safe to split up your accounts, have at it. Free can of tinfoil hat polish with every new account opened at Gnomes of Zurich Brokerage Inc.

 

[HFWR]

Like Southwestern Good Ole Boy Network Wildcat Oil Reserve Credit Union?

Hey, y'all, at least I got a free calendar...

 

[Running_Man]

And you seem to be desparate for us to agree with you. Careful, or I will repeat the thing about the goats...

I do not recall taking a position on this as I have not yet decided what would be the best course of action. I was curious as to the thought of impossible bankrupcty of a major brokerage house. I have monitored this website for several months and enjoy the good thoughts brought here, but the frequent taunting of unfavored opinion is detrimental to the points attempting to be made. My few posts should indicate I am in no way desperate for attention despite the several months of following this website for good ideas. I enjoy more than one point of view myself

 

[FinanceDude]

I do not recall taking a position on this as I have not yet decided what would be the best course of action. I was curious as to the thought of impossible bankrupcty of a major brokerage house. I have monitored this website for several months and enjoy the good thoughts brought here, but the frequent taunting of unfavored opinion is detrimental to the points attempting to be made. My few posts should indicate I am in no way desperate for attention despite the several months of following this website for good ideas. I enjoy more than one point of view myself

For a reall good time, try being one of the only FA's on here..........like me............

 

[audreyh1]

If a brokerage goes bankrupt, it doesn't mean your investments go to zero. Your mutual funds hold real company stock. That doesn't change no matter what the financial situation of the brokerage - what you own is securities.

Now if a company goes bankrupt, it's stock can go to zero - no insurance for that!

Audrey

 

[brewer12345]

I do not recall taking a position on this as I have not yet decided what would be the best course of action. I was curious as to the thought of impossible bankrupcty of a major brokerage house. I have monitored this website for several months and enjoy the good thoughts brought here, but the frequent taunting of unfavored opinion is detrimental to the points attempting to be made. My few posts should indicate I am in no way desperate for attention despite the several months of following this website for good ideas. I enjoy more than one point of view myself

OK, well, great. A question was asked and answered by myself and others. If you have an alternate view, then let's hear it. If your alternate view is "I am just terrified so I will split up my accounts", expect to be further mocked. If you have a cogent argument, we will all be interested since the question is of more than academic interest to many/most of us.

 

[Running_Man]

OK, well, great. A question was asked and answered by myself and others. If you have an alternate view, then let's hear it. If your alternate view is "I am just terrified so I will split up my accounts", expect to be further mocked. If you have a cogent argument, we will all be interested since the question is of more than academic interest to many/most of us.

Actually this thought has never crossed my mind prior to this thread as I do not have in excess of 500 thousand at the present time to invest as I have one broker and my 401K through my present mega corp.

But your post is further to my post, why must you mock? If the possibility of SIPC ever being used is so little as to be inconsequential then why does it exist at all? Is the 500 thousand also worthy of mocking as it is of so little use except to placate those you would insult who would seek it's insurance?

My posts did not really concern the topic per se but the frequency of which other stated alternated views which are in stark contrast to the voluminous posters, when the event is low probability, on a variety of topics. Brewer, I know from readings of your posts you have many good ideas, but you do seem to be troubled by low probability thoughts and find amusement in belittling others taht would hold them. I find no benefit in that activity, most great ideas that have developed in society you will find were openly mocked at the time by leading voices of the era which had no time for such out of touch views. (the earth is flat, sun revolves around the earth, etc..)

I am hopeful you will find room for some patience for the point of view of a minority, even when you feel it is misguided.

 

[brewer12345]

I hear where you are coming from, and I have some sympathy for those with minority views. After all, I generally have a portfolio of the most hated stocks on the planet; I definately hear plenty of negative sentiment all the time.

The reason you will see me mocking the chicken little's that run around here from time to time is partially a conditioned reflex from dealing wth h0suc (consider yourself lucky if that name means nothing to you), and partially because you must pick what you will choose to worry about very carefully. By the latter, I mean that there are many, many possible outcomes in the world, including those that are lots of standard deviations away from the mean. Some things you can insulate against without spending undue time and effort (proper portfolio diversification will save you from a Depression or a 1966 scenario, for example). Other things you simply cannot reasonably insulate yourself against: catastrophic global warming, capital markets or inflation much worse than the historical record, collapse of the global financial system, etc. It isn't worth worrying about the second category because you cannot do anything about it anyway.

It is pretty clear to me that a major brokerage failing falls in the second basket. Most FIRE'd folks can either learn to properly classify potential worries into basket A or basket B, do what they can to stay safe, and get on with life. Worrying about basket B stuff will either keep you at work a lot longer or have you worried about stuff you cannot do anything about and ruin your life.

 

[Baxter]

Exactly. I wouldn't go over the limits on the West Coast Gay, Lesbian, Bisexual and Transgendered Mutual Savings Bank, either.

Off-topic, but DW wanted to move our checking account to Bowie Bank when it opened:

http://www.chartattack.com/damn/2000/01/1003.cfm

I said no, and the bank closed soon after it opened. Some risks are easier to spot than others.

 

[bpp]

Some things you can insulate against without spending undue time and effort (proper portfolio diversification will save you from a Depression or a 1966 scenario, for example). Other things you simply cannot reasonably insulate yourself against: catastrophic global warming, capital markets or inflation much worse than the historical record, collapse of the global financial system, etc. It isn't worth worrying about the second category because you cannot do anything about it anyway.

It is pretty clear to me that a major brokerage failing falls in the second basket.

I don't agree.

1) It is trivially easy to do something about it -- simply keep some assets somewhere else.
2) Major brokerage failures are not unheard of (one happened here just 10 years ago -- I believe mikew had some assets there at the time). Yes, you would likely come out more-or-less whole eventually (so comparisons to global warming or financial system collapse are overblown), but it could be inconvenient to aggravating or worse if you don't have something somewhere else to fall back on in the interim.

Seems to me at it ranks as at least an easily avoidable nuisance, and not as a paranoid doomsday scenario, so I don't see the need for tinfoil hat analogies.

 

[brewer12345]

Great, then open multiple accounts. Good for you. :

 

[JohnEyles]

The reason you will see me mocking the chicken little's that run around here ...

But Brewer, you are somewhat of a chicken little yourself, when it comes to insurance
companies, specifically with respect to immediate annuities. I realize, of course, that
the insurance company is agreeing to PAY me money, whereas the brokerage house
simply has to NOT LOSE my money. But still, it's a radically different attitude about
the potential risk of catastrophic failure of an established financial institution, that I
don't fully understand.

 

[brewer12345]

But Brewer, you are somewhat of a chicken little yourself, when it comes to insurance
companies, specifically with respect to immediate annuities. I realize, of course, that
the insurance company is agreeing to PAY me money, whereas the brokerage house
simply has to NOT LOSE my money. But still, it's a radically different attitude about
the potential risk of catastrophic failure of an established financial institution, that I
don't fully understand.

Simple:

Brokerage: Custodian of my assets. They have little or no claim to the actual assets, at least if we are talking about regulated US brokerage houses. If they blow up, I might have to wait a while for things to clear up, but the creditors of the brokerage do not have a claim on my stocks, bonds, etc.

Payout Annuity from an insurer: I loan the insurer money which they pay back to me. If the insurer blows up, my assets are NOT segregated; all I bought was a promise of repayment from the insurer. If they go balls up, I can stand in line with the other creditors.

Also, a brokerage account is only until I choose to move the account. A payout annuity is forever.

 

[Bob_Smith]

It is trivially easy to do something about it -- simply keep some assets somewhere else.

Is it really as trivial as that?

I'll quote justin up-thread:

re: costs - let's say splitting the money in two at vanguard and elsewhere means you can't get into the admiral funds and save the 0.1% in expense ratio. That's $1000 per year on a $1,000,000 portfolio...

While you could probably conserve some of those savings, you'd likely give up a fair amount of them. Add to that the costs associated with passing on Flagship perks. Add additional costs associated with funds with higher ERs than Vanguard's investor shares. Add potential account fees that Vanguard waives.

Plus, the OP references a 1.2M portfolio. To remain under the SIPC limits he'd need to split into at least 3 companies - $400,000 each. In a bull market he'd hit $500,000 very quickly - now he needs to transfer a chunk from each of the three companies (or two, or one - gotta keep on top of that) to a fourth company. Or maybe one has tanked enough to handle the excess, but shortly after you get the assets transfered in, that company's holdings shoot up and now you've got to take some out. All the while you're trying to maintain some semblance of an asset allocation while juggling accounts at four separate companies with the intent of staying under $500,000 limit. Transfer forms. Mailbox clutter. More 1099s to deal with at tax time. An avalanche of paper to sort through and file.

Not trivially easy at all, IMO.

 

[bpp]

While you could probably conserve some of those savings, you'd likely give up a fair amount of them. Add to that the costs associated with passing on Flagship perks. Add additional costs associated with funds with higher ERs than Vanguard's investor shares. Add potential account fees that Vanguard waives.

I don't know what Flagship perks entail, but you could, for example, convert some of your Vanguard mutual fund shares to VIPERs shares for a $50 fee and gain instant access to Admiral-level ERs that way. Then transfer the shares in kind to another broker. No taxable events.

Plus, the OP references a 1.2M portfolio. To remain under the SIPC limits he'd need to split into at least 3 companies - $400,000 each. In a bull market he'd hit $500,000 very quickly - now he needs to transfer a chunk from each of the three companies (or two, or one - gotta keep on top of that) to a fourth company. Or maybe one has tanked enough to handle the excess, but shortly after you get the assets transfered in, that company's holdings shoot up and now you've got to take some out. All the while you're trying to maintain some semblance of an asset allocation while juggling accounts at four separate companies with the intent of staying under $500,000 limit. Transfer forms. Mailbox clutter. More 1099s to deal with at tax time. An avalanche of paper to sort through and file.

Ok, then just split it into two companies, 600k each. Now you at least have most of your assets under SIPC cover, and you wouldn't be sideswiped by your broker blocking your domain name or by penny-stock pumpers hacking into your single account. Expand beyond that only when and if you feel the need outweighs the extra paperwork burden.

Not trivially easy at all, IMO.

It can be as easy or as complicated as you have the tolerance for. All I'm saying is that it is not crazy to consider it.

 

[scrabbler1]

I know this thread has been dormant for over 3 years, but I did a search for "SIPC" and read through this big one. (I am a new member to this FIRE forum.)

Because of this year's bull market, I have pierced the $500k cap in my main taxable account (to about $600k now). I also have an IRA with the same brokerage house but according to SIPC rules that account is subject to its own $500k limit so it is totally protected (it is just under $300k). I have a small taxable account at another brokerage house so it is protected, too.

I also read the post someone made about Fidelity (my main brokerage house) buying additional insurance to protect its investors so I feel better about that.

I did appreciate the lively discussion in this thread even if it wandered a bit.

 

[audreyh1]

Below is Fidelity's response to the 500k SIPC insurance cap. Seems reasonable to me.

The Securities Investor Protection Corporation (SIPC) protects customer accounts up to $500,000, with a limit of $100,000 for cash balances. In addition to the portion protected by SIPC, Fidelity purchases additional coverage from the Customer Asset Protection Company (CAPCO) to cover the remaining net account value. This additional coverage is called Excess SIPC Coverage. CAPCO, a licensed New York insurer, has received an A+ financial strength rating from Standard& Poor's.

Fidelity also has a customer guarantee that protects you in the event that a hacker breaks into your account.

Almost all of our assets are in accounts at Fidelity. I think they have provided us adequate protections, so I enjoy the convenience.

Audrey

 

[megacorp-firee]

I think that you would be better served by spending the time and money to put a meteorite deflector on your car rather than opening new acccounts to stay under the SIPC limits. D

So your saying, ... if I have the deflector up already, then I should start working on spreading for SIPC limits then?