Some client questions and discussions are more challenging than others. The ones I’ve been having in the wake of the recent banking crisis (you can read more on that here) have been hard. Not because these are contentious topics to address and not because I don’t know how to answer them. They are challenging because I wish my clients didn’t have to ask them. I wished we lived in a world where such basic matters were absolutes that didn’t have to enter clients’ minds. I wish we lived in a world where concerns over the safety of their hard-earned money didn’t need to be enter their consciousness. I wish we lived in a world where confidence and security were 100% guaranteed. Sadly, we don’t live in that world – and as a result, let’s discuss the question is my money safe?
Safety is Top of Mind
It’s natural for the safety of cash and investments to be top of everyone’s minds these days. After all, the events that unfolded at Silicon Valley Bank resulted in a run on the bank, driven largely by a collapse in confidence in the institution. If it can happen to a bank of that size, what’s to say it won’t happen at your bank? And what happens if it does?
Generalities vs. Your Situation
This article will cover two broad categories – bank accounts and investment accounts – at a general level. While this information may translate to your situation, it may not or you may still have lingering concerns. If you still have specific concerns about your accounts and your financial assets after reading this article, please reach out to your advisors or feel free to contact me. It’s important to you feel secure so please find a way to get answers to your questions. I’m happy to help.
If your bank is part of the Federal Deposit Insurance Corporation’s program, your accounts are covered per the terms of the FDIC. We wrote more about bank insurance here. Keep in mind that not all banks will be FDIC insured so take the time to review any banks where you keep accounts. If you are at an FDIC-insured bank and you are within the limits, those balances are 100% insured.
There is a belief in recent weeks, in the wake of the three recent bank failures, that the government will always back all deposits – whether they are within the insured limits or not. After all, that is exactly what happened at the three failed banks (as the government accessed a fund paid into by banks since the financial crisis, to backstop all depositors). Please note that nothing has changed officially. The US Federal Reserve and Treasury have stopped short of making such a statement and the FDIC has not adjusted its limits. So at this time, if you want 100% certainty that your cash balances are 100% secure, ensure you are at an FDIC bank and stay within the stated FDIC limits.
Bank accounts are relatively easy to understand – but what about investment (or brokerage) accounts you may hold at a variety of firms (like Schwab, Fidelity, TD, Vanguard, etc). It’s likely that those balances afr outpace any bank accounts you hold, so it’s important to address this as well.
(Please note: My comments will address Schwab specifically but please again, if you are at another broker-dealer and have questions, reach out to your advisor to get the answers you deserve)
This question has been particularly common amongst our clients as we custody client assets at Charles Schwab & Co (“Schwab”). Schwab has been in the news during this banking tumult as they have a banking entity (that is completely separate and segregated from the broker/dealer that custodies invested assets). As was the case at SVB, Schwab’s banking entity also has investments in long-dated treasuries that have declined in value as interest rates rose and due to this apparent corollary, Schwab has been talked about on business news shows and its stock price has fallen considerably – all stoking clients’ concerns.
Before I dive into details of how investment accounts are treated, let me start with this. Schwab custodies over $7 trillion is assets. $7 trillion. Much is discussed about banking entities that are “too big to fail” – well, suffice it to say, that Schwab, with that much of the country’s wealth under its custody, is squarely in that category as well. It’s an exceptionally well run organization that is highly, highly unlikely to fail for a multitude of reasons but its size and role in the US economy and investment landscape just adds to the case against that argument. Now, on to more specifics to address this concern.
Within your Schwab account (whether it be a taxable account or a retirement account like an IRA), there may be both cash and securities (such as stocks, bonds, mutual funds, or money market funds). The securities you hold in your account are registered in your name within Schwab’s custodial side of the business. They belong to you and cannot be taken away from you, even in the highly unlikely event Schwab was to go bankrupt or become insolvent.
The cash within your Schwab investment account (pure cash – not cash equivalents like money market funds) is deemed to be part of Schwab’s banking operation. As a result, any pure cash balance in your Schwab investment account(s) falls under the FDIC insurance limits discussed above as Schwab Bank is FDIC insured. Please note we keep very little pure cash in client accounts currently given the current spread differential, choosing instead to use money market funds (which fall under the custody (non-bank) side of the business).
Within the custodial side of Schwab’s business, there is also insurance provided by another agency called Securities Investor Protector Corporation (SIPC). SIPC exists to protect investors in the very rare event that a broker/dealer fails and client assets go missing due to fraud or misdealings. Please note that all broker/dealers (including Schwab) are subject to frequent reporting and regulations that help to ensure there are no signs of fraudulent behavior. However, to give investors added peace of mind, insurance does exist (paid for by premiums paid by member firms). SIPC insurance provides limits of $500,000 per customer ($250,000 counted towards cash). Additionally, Schwab pays for extra SIPC insurance that gives further protection to its customers.
You can read more about the specific protections afforded to you at Schwab regarding security of your accounts here
I know these are unsettling times. I can hear the fear and exhaustion in clients’ voices when they ask these questions. On top of everything we’ve been thru over the past three years, now we need to be thinking about this? Simply put – yes. We should be having these discussions, asking the questions, assessing what we know, and then moving forward with confidence.
I’ve done just that – I’ve asked myself these questions and I’ve then done the work and research to find the answers. I’ve looked into the safeguards. I’ve looked into the mechanics. And based on the work I’ve done, I feel very confident in the security of FDIC banking institutions and country’s largest broker/dealers including Schwab. I have been and remain very comfortable with the fact that all of my assets (both investments and bank accounts) are at Schwab, along with all my family’s investment accounts.
I encourage you to find a way to put your worries to rest. Confidence shouldn’t be a luxury – it’s a requirement for moving forward. Do what you need to do to find it for yourself.
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