How Are Your Assets Protected?

By Gene Balas, CFA®
Investment Strategist

In light of several recent bank failures (both in the U.S. and Europe), many investors are understandably questioning whether their funds are safe at any financial institution. When answering this question, there are two important points to remember:

Please note that SEIA and SIA are NOT in any way affiliated with the recently failed Signature Bank.

• Assets that are held in the form of stocks, bonds, mutual funds, ETFs, money market funds, etc. are held indirectly in your name. You own them – not SEIA, SIA, nor the custodians we use. Our custodians (Fidelity Brokerage Services, LLC (Fidelity) and Charles Schwab & Co., Inc. (Schwab)) hold the securities in safekeeping in either ‘book entry’ or electronic form. Importantly, we (SEIA/SIA) do not hold your securities. That’s the role of the custodian – which also performs transactions on your behalf.
• While the securities are held in ‘street name’ – permitting us to instruct the custodian to trade shares on your behalf – you are the beneficial owner of the shares. Even if Fidelity or Schwab became insolvent for some reason, you would recover your securities. Fidelity and Schwab are not able to commingle those securities with their own funds, nor use those securities for any purposes other than holding them on your behalf and conducting trades as directed.

As to the financial health of our custodians, Charles Schwab, a publicly-traded company that includes both a bank and a brokerage firm, is well-capitalized. A common measure of the capitalization of a bank is known as the ‘tier one capital ratio,’ which is a calculation of a bank’s common equity and certain other items divided by its risk-adjusted assets. This represents the financial cushion a bank has available to absorb losses – or to distribute to depositors should they withdraw more of their deposits than the bank holds in cash on hand.

Schwab has a tier one capital ratio of 28.9%. The minimum set by U.S. bank regulators is 4%, according to Bloomberg. By comparison, the tier one capital ratios of some other banks include Goldman Sachs at 15.1% and Bank of America at 13.0%.

Fidelity, unlike Schwab, is not a bank, so it doesn’t have an equivalent ratio. Fidelity is a privately-held firm and, as such, doesn’t file financial statements with the SEC. However, Fidelity’s parent company (FMR) has a rating of A+ from S&P and a rating of A1 from Moody’s – placing it solidly in investment grade territory.

Additionally, if there were ever an issue that compromised the integrity of one of the firms involved in custody of your assets, you’re covered by Securities Investor Protection Corporation (SIPC) insurance. SIPC is a nonprofit organization that protects stocks, bonds, and other securities – covering up to $500,000 in securities, including a $250,000 limit for cash held in a brokerage account for each separate entity (e.g., joint tenant or sole owner account, etc.). More information on SIPC protection can be found here.

Above and beyond SIPC protection, both Fidelity and Schwab provide customers with ‘Excess of SIPC’ coverage due to any adverse issues pertaining to Fidelity or Schwab. Limits differ between the two firms, but generally would cover most investors’ account values. Fidelity’s coverage is unlimited, while Schwab covers investments up to $149.5 million per customer, up to $1.15 million of which may be in cash.

It should be noted that excess of SIPC protection does not cover investment losses in customer accounts (including losses due to market fluctuation) and only applies to amounts in excess of SIPC coverage. For more information, please reach out to your SEIA advisor or SIA relationship manager who can provide you with additional details from Fidelity or Schwab.

As to cash held within a bank-affiliated instrument that may be part of a brokerage account, insurance provided by the Federal Deposit Insurance Corporation (FDIC) would apply. This could be the case with brokerage ‘sweep’ accounts, which hold uninvested cash. The FDIC is an independent agency that maintains the Deposit Insurance Fund which is backed by the full faith and credit of the United States government. Its purpose is to protect depositors’ funds placed in banks and savings associations. The FDIC insures accounts held at member banks up to $250,000 per depositor, per insured bank, based on ownership category. FDIC insurance would apply; you may find out more information here.

For more information on Schwab’s investors’ protection, please refer to its policies here. And for Fidelity, its policies regarding account protection are outlined here.

Certain assets, however, are not eligible for SIPC protection. Among these (in most cases) are commodity futures contracts, precious metals, as well as investment contracts such as limited partnerships – including certain “alternative” or private investments – and fixed annuity contracts that aren’t registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

We hope this information helps answer any questions or concerns you may have. As always, please don’t hesitate to reach out to your SEIA advisor or SIA relationship manager for more information or assistance. We’re always happy to serve you in any way we can.

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These materials have been independently produced by SEIA. SEIA is independent of, and has no affiliation with, Charles Schwab & Co., Inc. or any of its affiliates (Schwab) or Fidelity Brokerage Services, LLC (Fidelity). Schwab and Fidelity are registered broker-dealers and members SIPC. Neither Schwab, nor Fidelity, has created, supplied, licensed, endorsed, or otherwise sanctioned these materials nor have they independently verified any of the information in them. SEIA provides you with investment advice, while Schwab and Fidelity maintain custody of your assets in a brokerage account and will effect transactions for your account on our instruction.

The information contained herein is for informational purposes only and should not be considered investment advice or a recommendation to buy, hold, or sell any types of securities. Financial markets are volatile and all types of investment vehicles, including “low-risk” strategies, involve investment risk, including the potential loss of principal. Past performance does not guarantee future results.  For details on the professional designations displayed herein, including descriptions, minimum requirements, and ongoing education requirements, please visit seia.com/disclosures. Signature Estate & Investment Advisors, LLC (SEIA) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SEIA, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products, or services referenced here are independent of Royal Alliance Associates, Inc.

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