Money Rehab with Nicole Lapin - WTF is SIPC? The Closest Thing You'll Get To Investing Insurance

Episode Date: January 31, 2024

You’ve probably heard some brokerages say they're "member SIPC." Have you ever wondered what it means to be member SIPC? It's definitely not a cool Soho House-esque club that you’re missing out on. But, it is a club that you definitely want your brokerage to be in. Nicole explains with SIPC insurance is, how it's different from FDIC insurance, and why you want to make sure your brokerage has it.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. You've probably heard at the end of the ads for this podcast, a message like Robinhood Financial LLC member SIPC. Have you ever wondered what the heck it means to be a member of SIPC? Like, is it a club? Is it a new Soho house? It's definitely not a cool membership that you're missing out on, but it is a club that you definitely want your brokerage to be in.

SIPC is a kind of insurance, and in order to understand it, it's first helpful to understand FDIC insurance, which I'm sure you've heard of, but just in case, here's the scoop. FDIC stands for Federal Deposit Insurance Corporation. The FDIC issues a type of insurance paid for by banks that protects, up to a limit, any checking accounts, savings accounts, money market accounts, and CDs that are held at that bank in the event of a bank failure. It even protects money orders and cashier's checks if the bank fails. It will protect each individual for $250K per account category. Now, FDIC coverage does not

protect you from fraud or human error. It only goes into effect if the bank fails, which is a very rare thing, although it did just happen twice last year with Silicon Valley Bank and then First Republic. That's probably when you last heard of FDIC insurance, and that's what allowed people who banked with SVB and First Republic to get their money back. So if a bank fails, what does that look like in practice? Let's say you have an individual emergency fund savings account with $20K in it and a joint checking account with your partner that has $500K in it. What are you covered for here? Well, both of these accounts, the individual and the joint accounts, are different categories. So they are all protected up to $250,000 individually per category. So your emergency fund savings account, fully protected for that $20,000. And that joint checking account, well, you and your partner are each protected for up to $250,000 for a total of $500,000.

So the money in that account is fully protected too. So as you can see, you can actually end up being covered for quite a bit more than 250 grand. And if you happen to have over 250 grand in one bucket, there are specialized accounts that spread your money over multiple banks. Most of these do have limits, but the limits are in the millions of dollars. So far, I've used the word bank, but technically the phrase is financial institution. That is more correct because cash accounts at qualifying brokerages operate with the same rules and the same protections. So if you have a cash account or CDs with brokerages like Vanguard, Charles Schwab,

Fidelity, Robinhood, those assets are all protected by FDIC insurance. Now, there's an identical system in place for credit union accounts. That program is the National Credit Union Share Insurance Fund, and it offers the same 250K coverage. It also offers separate coverage for joint versus individual accounts, as well as ensuring that cash assets in retirement accounts are protected. Just like FDIC insurance, you don't have to do anything since it's paid for by the credit union and applies as soon as you open the account. But neither FDIC insurance or the credit union equivalent protects securities like stocks and bonds. For that, your brokerage needs a different type of insurance. Yes, now we're talking about SIPC insurance. Thankfully,

you don't have to shop for that either. Almost all brokerage firms that are legally allowed to operate in the United States provide their clients with insurance through the Securities Investor Protection Corporation, or SIPC. Again, up to a limit, which is $500k per account. The tiny fraction of firms that aren't insured sell a narrow range of highly specialized products and are required to disclose that they don't have any protection via SIPC. And just a guess, that niche type of firm isn't right for you. But your Robinhood fund money account, your bonds that you inherited from your grandma, or your Roth with Vanguard are all protected by SIPC insurance.

Of course, I'm just filling in the blanks with these brokerages. You can keep your stocks wherever makes you happy, so long as it's a SIPC-insured brokerage. The Securities Investor Protection Corporation was created in 1970 by an active Congress. Like the FDIC, it's made to insure failing brokerages. If a firm fails slowly, it has time to shut down consumer accounts and transfer all assets elsewhere. Once all customers have custody of their accounts, the firm will liquefy or sell off their assets and pay off their debts. However, if a firm is poorly managed, SIPC will step in and take over the books. Historically, SIPC insurance rarely ever gets used. Usually, consumers can be made whole just by returning their assets to their custody. In rare cases where customers' cash and securities cannot

be located, SIPC will cover them for up to $500K. Just like FDIC insurance, different categories of accounts are insured separately. Also similar to FDIC insurance, SIPC insurance makes a distinction between your personal account and your joint accounts. So you could be protected for up to half a million dollars on your personal account and then separately for another half a mil on your joint account. But unlike with FDIC insurance, joint accounts are only protected for 500k per account, not per person. For example, if you are a baller and you and your partner have a joint Roth worth a million bucks, that whole account is covered for only 500 grand. Now, SIPC insurance only applies to losses that result from custody issues for failed firms.

It does not protect you if you sell a bad investment or those investments go down in value. It also doesn't protect assets from theft by outside parties. And it doesn't protect commodity assets or crypto. Speaking of which, you can buy crypto insurance, but you have to pay out of pocket for it. One of the most notorious cases where SIPC insurance came into play was Bernie Madoff's Ponzi scheme. His firm was taking investments from new clients to pay off old clients. Madoff's firm had both in-house clients and clients from other funds. In that situation, only direct investors of the firm

were covered by SIPC. It was ultimately determined that the company was such a scam that no assets were actually being bought by the firm. Clients thought they had accounts that were making 40% annual returns, but sadly they did not. It was all made up. So SIPC insurance only covered the cash investors deposited in the firm, not these imaginary Fugazi profits. Because SIPC insurance only covered the cash investors deposited in the firm, not these imaginary fugazi profits. Because SIPC can only be responsible for things that actually exist, not fraud with crazy made up returns. If you want to check if your brokerage has this type of insurance, you'll be able to

find it on their website. It should be all the way down at the bottom of the page with the careers, contact us, other disclosure information that's listed there. So it's all the way down there with the legal disclosure stuff. Keep scrolling. You can also always Google it. Welcome to 2024. For today's tip, you can take straight to the bank. If you or someone in your family has a safety deposit box, the contents are not insured by the FDIC. You need to buy separate safety deposit box insurance. Only a few companies offer it and your bank might be able to tell you who they recommend. Money Rehab is a production of Money News Network.

I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one on one intervention with me. And follow us on Instagram at Money News and TikTok at Money News

Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.