Q: Brokerage houses have additional insurance that covers certain events relative to my deposit. Should I be concerned when the funds on deposit at a major brokerage exceed the insurance limits?
Let’s assume this refers to SIPC coverage brokerage firms use. While loosely similar to the more familiar FDIC insurance to cover bank deposits, SIPC insurance is much more limited in scope.
Essentially, SIPC insurance provides coverage from loss due to the brokerage firm going out of business. It provides up to $500,000 of protection on securities and up to $250,000 in cash in excess of what is recovered. It does not provide coverage from a decline in the value of investments.
To help visualize an example of when SIPC would come into play, let’s use an example of a $5 million client account:
· Assume the brokerage firm fails, resulting in $5 billion of client claims on assets.
· Assume 90% of clients’ assets ($4.5 billion) are recovered. The actual historical recovery rate is 98.7% according to SIPC.
· The client in this example holding $5 million in SIPC eligible assets would receive $4.5 million from recovered assets and $500,000 from SIPC. The loss to the $5 million client account would be zero.
It’s exceedingly rare for a client to be entitled to recover damages under SIPC and not be made whole because of the $500,000 limit.
Also, most large brokerage firms purchase “excess of SIPC” insurance, which insures clients for any losses above the $500,000 limit.
Ultimately, clients do not need to be concerned when funds at a brokerage exceed the coverage limits.
More detailed information about SIPC coverage can be found here.
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