When you deposit money into a bank account, the bank uses those funds to make loans. In the unlikely event that too many loans go bad or the banks become insolvent, the FDIC (Federal Deposit Insurance Corporation) will make account holders whole up to $250,000 per account. That is why you may have heard that you should never have more than $250,000 in any bank account.
Brokerage accounts are different. Whereas the funds within bank accounts are aggregated by the banks so that the bank can use the funds to lend money, brokerage accounts are legally required to be segregated from the assets of the brokerage firm. In other words, the brokerage firm cannot use the funds in your account under any circumstances. That means that if the brokerage firm gets into financial difficulty, your accounts should not be impacted in any way; they are not an asset of the brokerage firm and they cannot be used by the brokerage firm to satisfy its obligations.
In the unlikely event that a brokerage firm breaks the law and comingles client assets with the assets of the firm, thereby committing fraud, the Security Investor Protection Corporation (SIPC) would step in. The SIPC covers losses due to fraud up to $500,000, including up to $250,000 for cash claims per account. Understand that the losses must be due to fraud – not due to market performance. Additionally, coverage does not apply to all securities, although it does apply to cash, stocks, and bonds. In addition to SIPC insurance, many brokerage firms carry additional insurance to protect investors if losses exceed SIPC limits.
At Core Wealth Management, we collaborate with our clients to devise, implement and manage a customized investment program that is designed specifically for you and that is consistent with both your overall financial plan and your risk profile. We hold ourselves to the highest set of standards, caring about your interests as much as you do.
Contact us today to discuss a financial plan that meets your needs and goals.