SIPC insurance?

[cyclone6]

I'm thinking about consolidating all of my holdings in my E*Trade account from various other sources. But I see that the SIPC insurance only goes to 500k. I've got just about 1.2M, and would sure like to have it all in one place - just for convienence.

Do you folks have most holdings in one institution, or spread it around?

Just curious...

Thanks!

 

[Patrick]

Spread it!

 

[Nords]

I'm thinking about consolidating all of my holdings in my E*Trade account from various other sources. But I see that the SIPC insurance only goes to 500k. I've got just about 1.2M, and would sure like to have it all in one place - just for convienence.

The financial professionals can tell you better than I can remember, but I can't remember a situation where the SIPC and the brokerage's private insurance couldn't cover their customers. E*Trade may carry more than the SIPC requirement.

Do you folks have most holdings in one institution, or spread it around?

We have most of our portfolio with Fidelity, a bit with Tweedy, Browne (Global Value) and a couple CDs with Pentagon FCU & Navy FCU. We'll eventually consolidate the Tweedy into Fidelity and just chase the highest CD rates with whatever brokerages or credit unions can offer us. I don't see any reason to spread it around.

 

[saluki9]

I wouldn't worry about this too much. In addition to SIPC Etrade also has a $600,000,000 policy with Lloyds of London.

in addition, I just checked their financial statement and they are well within the capital requirements for Broker dealers.

 

[Bob_Smith]

I don't see any reason to spread it around.

I agree with Nords. This is not on my list of concerns. I did look into it at one time but I don't recall the specifics - I just recall checking it off my list of things to be concerned about.

 

[Patrick]

I don't understand why people aren't concerned about the possibility of losing $700K. That's a lot of money to me.

 

[Bob_Smith]

I don't understand why people aren't concerned about the possibility of losing $700K. That's a lot of money to me.

The possibility of losing money is remote. SIPC protection is only the first line of defense; there's usually a great deal more. And the nature of the securities is such that you're already assuming the risk that the securities themselves will tank - so what's left? Fraud. Theft of securities. The brokerage firm holding the securities tanks, the records are messed up, and the court appoints a trustee to sort it out... So I don't place assets with any firm that isn't an SIPC member, I make sure they have insurance to cover the rest, I avoid small operators, I maintain CDs/I-Bonds that I could live on for a long time if my firm, Vanguard, tanks (not likely), and I reconcile and keep copies of statements.

Spreading assets around due to SIPC limits would increase my costs, make allocation and re-balancing more difficult, and generally complicate my record-keeping. It's just not worth the extra cost and hassle, IMO.

 

[uncledrz]

I'd try to stay within the SIPC insurance, no reason not to.

Another reason to spead funds in more than one account is to avoid potential problems that would tie up all of your funds. For example, Vanguard had access problems from Thailand not too long ago. Trying to prevent fraud, but if you are in Thailand for an extended period of time, nice to be able to access accounts that are not blocked.

 

[Nords]

I don't understand why people aren't concerned about the possibility of losing $700K. That's a lot of money to me.

It's a lot of money to most people, but the major brokerages are more than insured for it. I don't worry about it any more than I worry about being struck by lightning while I'm surfing... it's certainly not enough to make me paddle in!

 

[JohnEyles]

Another reason to spead funds in more than one account ...

I became a little nervous about having SO much of my money at Schwab, which
I like a lot actually. So I opened a Vanguard Mutual Fund account. This has the
advantage that I can trade the highly-regarded Vanguard funds for free. Even
though many of these have ETF equivalents that can be traded cheaply at Schwab,
others of interest to me do not - like allocation funds like Wellington and Wellesley,
and their bond funds (particularly the muni bonds).

It's interesting that the prevailing attitude towards this question (don't worry - be
happy) is so different from that towards the immediate annuity (if you really MUST
do this stupid thing, at least spread it among several insurers). I would like to hear
what Brewer has to say about this question.

 

[bpp]

I'm with the "spread 'em" crowd. No reason not to. And SIPC doesn't cover all possible problems; tio z mentioned Vanguard blocking Thailand as one possible issue, and another is that SIPC doesn't protect you if a hacker breaks into your account. A little extra paperwork seems like cheap insurance against single-point failure.

 

[Dawg52]

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.

 

[brewer12345]

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. Definately tinfoil hat territory here.

What I think would be sensible precautions would be to make sure you do business with a large brokerage and see that they have excess insurance over the SIPC limit. Frankly, the circumstanes under which a major borokerage fails are likely to be one in which either we all have a lot more problems to worry about (like finding food), or a case where the Fed organizes a bailout because a catastrophic failure of a Schwab/Fido/Merrill/Morgan Stanley/Vanguard is likely to endanger the entire world financial system.

 

[FinanceDude]

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. Definately tinfoil hat territory here.

What I think would be sensible precautions would be to make sure you do business with a large brokerage and see that they have excess insurance over the SIPC limit. Frankly, the circumstanes under which a major borokerage fails are likely to be one in which either we all have a lot more problems to worry about (like finding food), or a case where the Fed organizes a bailout because a catastrophic failure of a Schwab/Fido/Merrill/Morgan Stanley/Vanguard is likely to endanger the entire world financial system.

Would you not put FDIC limits in the same vein??

 

[brewer12345]

Would you not put FDIC limits in the same vein??

Pretty much, provided we were talking about a very large bank. If we are talking about the county credit union, I would stay below the insured limits.

 

[FinanceDude]

Pretty much, provided we were talking about a very large bank. If we are talking about the county credit union, I would stay below the insured limits.

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

 

[brewer12345]

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

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

 

[Running_Man]

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. Definately tinfoil hat territory here

Why is it anytime one asks a question and there is a disagreement over a low probability event happening that the response is "tinfoil hat territory". I take answers such as that as insulting the person since you are not able to provide an intelligent and rational counter-arguement so you demean anyone in disagreement. I find this type of arguement very disrespectful.

Do we honestly all believe a fraud cannot occur? If Amaranth can lose 2/3 of it's value in 2 weeks from 1 broker who independently lost over 6 billion dollars? The San Diego County Pension fund has lost 105 million out of 175 million in a supposedly "safe" investment and may lose the entire 175 million. San Diego County was "saved" because they had spread their investments around. That is the benefit of diversification of investments. All in one basket allows one lightning strike to wipe you out.



http://www.nctimes.com/articles/2006/11/26//news/sandiego/8_01_4311_24_06.txt

 

[brewer12345]

Why is it anytime one asks a question and there is a disagreement over a low probability event happening that the response is "tinfoil hat territory". I take answers such as that as insulting the person since you are not able to provide an intelligent and rational counter-arguement so you demean anyone in disagreement. I find this type of arguement very disrespectful.

Do we honestly all believe a fraud cannot occur? If Amaranth can lose 2/3 of it's value in 2 weeks from 1 broker who independently lost over 6 billion dollars? The San Diego County Pension fund has lost 105 million out of 175 million in a supposedly "safe" investment and may lose the entire 175 million. San Diego County was "saved" because they had spread their investments around. That is the benefit of diversification of investments. All in one basket allows one lightning strike to wipe you out.



http://www.nctimes.com/articles/2006/11/26//news/sandiego/8_01_4311_24_06.txt

If I were really trying to be disrespectful, I would have told you to go [moderator edit], right after you finished [moderator edit].

What would you like me to say? If a major securities brokerage goes seriously belly-up, it is likely that SIPC will blow up, as will whatever supplemental insurer is jumping in. Given the exposure that other capital markets players have to all the major brokerages, many other financial institutions would be in trouble, and there would be a cascading effect. So unless the Fed decided to backstop a bailout effort, kiss the world economy good-bye.

But if you are dealing with an on-shore regulated financial institution of any size that is watched by the federal regulators, the Fed, probably the FBI, the rating agencies, and the credit departments of all of their couter-parties, the likelihood of a serious problem is so many standard deviations away from the present that we might as well be worrying about the above-referenced meteorites, the Elders of Zion, and the state of the orgone field that surrounds pluto.

 

[justin]

Do we honestly all believe a fraud cannot occur? If Amaranth can lose 2/3 of it's value in 2 weeks from 1 broker who independently lost over 6 billion dollars? The San Diego County Pension fund has lost 105 million out of 175 million in a supposedly "safe" investment and may lose the entire 175 million. San Diego County was "saved" because they had spread their investments around. That is the benefit of diversification of investments. All in one basket allows one lightning strike to wipe you out.

The San Diego County pension fund made a bad investment. Simple as that. Their loss is not the kind of loss SIPC insurance covers. Why did you throw the San Diego County pension fund issue into this discussion at all?

 

[Nords]

I think that you would be better served by spending the time and money to put a meteorite deflector on your car...

For the safety of our posters, even our veterans, I think such comments should be preceded by the label "HUMOR WARNING!!". I was choking so hard laughing on my coffee that I could hardly spew it evenly across the monitor. EMS didn't know which one of us to wipe down first...

Why is it anytime one asks a question and there is a disagreement over a low probability event happening that the response is "tinfoil hat territory". I take answers such as that as insulting the person since you are not able to provide an intelligent and rational counter-arguement so you demean anyone in disagreement. I find this type of arguement very disrespectful.

Because the person asking the logical question was already given logical answers-- "very low probability of occurrence" and "adequate insurance". When the questioner keeps on arguing that it's still a concern, despite being a lower probability than a meteor strike, they're not being logical anymore... they're being paranoid. But somehow you've decided that the subsequent paranoid question wasn't disrespectful of the logical answer? What other logical argument is supposed to be put forth?

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.

Do we honestly all believe a fraud cannot occur? If Amaranth can lose 2/3 of it's value in 2 weeks from 1 broker who independently lost over 6 billion dollars?

No. We just believe that it has a very low probability of occurence and that appropriate risk measures have been taken. When I wear pants, I draw the line at belts & suspenders and I'm not tying a rope around my tinfoil hat in case the first two fail.

Ye gods, if Sarbanes-Oxley isn't reducing fraud then we're wasting a lot of money on audits. As for Amaranth, that seems to be more "poor volatility management" or even "stupidity" than "fraud".

All in one basket allows one lightning strike to wipe you out.

Diversification only works if the asset classes are uncorrelated (reducing volatility) and if the returns aren't hammered by some other adverse effect (like inflation). Frank Armstrong calls diversification for the sake of diversity "diworsification". And if spreading your money around two or three brokerages results in higher expenses then it strikes me as a high premium for little or no additional protection.

One could argue that staying with one broker is also the benefit of SIPC & private insurance. Otherwise I'm wasting my money on other types of insurance (property, auto, & liability) where I could be using the premium payments to diversify into REITs, gold, and beever cheeze futures. And yes, the probability of my diversifying into those asset classes is just as great as the probability of your basket being struck by lightning. No disrepect intended.

 

[bpp]

Forget SIPC, what about the other issues? A poster on this board had access to their account blocked just last month when Vanguard suddenly decided to shut out their entire country. Or what if a hacker breaks into your account and runs it down to nothing pumping and dumping penny stocks? And even with SIPC or too-big-to-fail protection, your money could be locked up for a while waiting for the dust to clear.

As for costs, there are enough reasonably-priced providers out there that I don't see that as a big issue.

Now excuse me while I go work on my meteor deflector.

 

[justin]

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. I think I could find a better use of the money than diworsifying into multiple account providers just to have that triple redundancy.

 

[Running_Man]

The San Diego County pension fund made a bad investment. Simple as that. Their loss is not the kind of loss SIPC insurance covers. Why did you throw the San Diego County pension fund issue into this discussion at all?

The only reason the SIPC is not covering that is that Amaranth was strictly in the hedge fund business. Many brokerages are both into Hedge Funds and the Brokerage business. One individual broker was able to lose 6 billion and as a matter of course the investigators could not determine the amount of the loss until weeks after the mismanagment of the funds occured. Had Amaranth had a brokerage unit, it too would have been bankrupted if not doing well enough to save them, and the SIPC would have stepped in for an orderly transition. In such a case you will not have access to your money for anywhere from 1-9 months.

 

[Bob_Smith]

Why is it anytime one asks a question and there is a disagreement over a low probability event happening that the response is "tinfoil hat territory". I take answers such as that as insulting the person...".

Not at all! This thread is about examining a low probability event and trying to determine how low the probability really is. Brewer did exactly that. I appreciate his candor.