We live in a world of acronyms. TBA, IDK, BTW and my personal favorite ROTFL. You might have to Google that one. In the world of investing, there is an acronym that you should become very familiar with, SIPC. Help me become familiar, you ask? Well OK, here goes…
The Securities Investor Protection Corporation (SIPC) is a non-profit organization created in 1970 under the Securities Investor Protection Act. SIPC provides protection on your brokerage account if your brokerage firm becomes insolvent. They also, in many cases, protect against unauthorized trading in, or theft from, your brokerage account. Important to note that SIPC does not protect against a decline in your securities.
Charles Schwab, our custodian of choice, is a SIPC member. The way SIPC works is by covering $500,000 for each account type (individual account, joint account, corporate account, IRA, Roth IRA, etc.). To bring this to life, here is a real example of how the coverage would work:
- Joe and Jane JTWROS brokerage account – $500,000 SIPC coverage
- Joe Roth IRA account – Additional $500,000 SIPC coverage
- Jane IRA account – Additional $500,000 SIPC coverage
With Charles Schwab, you have an extra level of protection from a Lloyd’s of London policy above the $500,000 SIPC coverage. This “excess SIPC” protection of securities is provided up to an aggregate of $600 million, limited to a combined return to any customer from a trustee, SIPC, Lloyd’s and other London insurers. Now that is some serious protection!
There are other considerations you should take into account when assessing the safety of your monies held in brokerage accounts:
- Are your securities held in street name at the DTC? (yes for you, this is good)
- Does your custodian pursue proprietary trading? (No for you, this is good).
- Is there are separation of advisor and custodian? (Yes for you, P&A and Schwab are separate. Do you remember Bernie Madoff? His clients answered no).
Bottom line, Schwab is a member of SIPC and thus you have some insurance protection on your accounts.
