Posted on November 8, 2008

Retirement Investors: Is Your Money Safe with a Stockbroker?

If your retirement money is invested with an FDIC-insured bank, then you know that it’s safe (at least up the FDIC limits of $100,000 or $250,000, depending on the type of account). That’s because FDIC is more than just an insurance company. It’s backed by the “full faith and credit” of the Federal government, meaning that in a worst-case scenario, Uncle Sam will step in. And Uncle Sam has the authority to print money.

But what about money that’s invested with a broker, like Charles Schwab or Merrill Lynch? Unlike banks, brokerages are generally members not of FDIC (the Federal Deposit Insurance Corporation), but of SIPC (the Securities Investor Protection Corporation). The two sound similar and fulfill similar purposes, so they’re pretty much the same thing, right?

Wrong. While we don’t want to encourage panic or fear-mongering, we’d like to point out that SIPC is an entirely different animal than FDIC—and a less robust one, at that.

Unlike the FDIC, SIPC is not a government agency. More importantly, it is not backed by the Federal government. Rather, SIPC is a nonprofit corporation that is funded by its members, primarily securities brokerages. In essence, it’s a big private mutual insurance company.

In the event of a huge meltdown of the financial system, FDIC insured savings would be paid off directly by the government if necessary. But once SIPC ran out of money, investors would be out of luck.

Is this likely? No. Is it possible? At least theoretically, yes.

So what should you do? That depends on your personal outlook for the financial system. Unless you expect a full-scale financial catastrophe, you can rest easy knowing your money is covered by SIPC. But if you can’t sleep unless your retirement money is guaranteed by the government with no ifs, ands, or buts, then only FDIC coverage will do. And that means investing only at an FDIC-insured bank.

One Comment on “Retirement Investors: Is Your Money Safe with a Stockbroker?”

  • I’m surprised there hasn’t been more talk about this during the financial crisis. There’s no guarantee that more brokers won’t go belly up. Hopefully people won’t lose their money.

    Posted by Chuck L. on November 10, 2008 at 8:36 pm

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