Are Brokerage Accounts Safe?
Published On: March 16, 2023
Written by: Ben Atwater and Matt Malick
Because of the banking scare that started with the failures of Silicon Valley Bank and Signature Bank last week, many investors now wonder whether their investment accounts are “safe.” There are two ways to answer that question.
First, marketable securities are all subject to varying degrees of market risk. Stock prices swing based on day-to-day news and investor attitudes. And the risk of a company failing and the stock price going to zero is always present, even with companies that are perceived as safe. After all, the KBW Banking Index, an index designed to track the performance of the leading banks and thrifts that are publicly traded in the U.S., has tumbled more than 25% since the beginning of March.
Bond prices also fluctuate, particularly when interest rates move or when the news cycle triggers fear about issuer default. Although we eliminate most credit risk by predominantly owning Treasury securities and FDIC-insured brokered certificates of deposit, interest rate risk still applies, and we do own investment-grade corporate bonds in certain client accounts. Month to date, the severe drop in market interest rates has more than offset any credit concerns as it relates to fixed income performance.
We can reduce market risk through prudent diversification, but we cannot eliminate it. And although volatility is stressful when prices are falling, it’s important to remember that volatility is the very reason why stocks have historically delivered great performance relative to risk-free Treasuries. Not to mention the historical anomaly that has prevailed over the last 18 months, whereby bonds have been about as volatile as stocks due to the huge moves in interest rates.
Over the past week, because of waning confidence in financial institutions, many investors are also wondering if their brokerage firm could go bankrupt, leaving their account subject to the brokerage firm’s creditors. Again, part of this fear stems from the weakness in financial stocks.
To be clear, this is not a real risk. Client securities, such as stocks and bonds that are fully paid for or excess margin securities, are segregated from broker-dealer securities, in compliance with the SEC’s Customer Protection Rule. This is a legal requirement for all broker-dealers.
In other words, your account holdings are registered in your name, not on the balance sheet of your brokerage firm. Therefore, in the unlikely event of a broker-dealer’s insolvency, these segregated assets are not available to general creditors and are protected against creditors’ claims. Government regulators require rigorous reporting and auditing requirements to help ensure all broker-dealers comply with the Customer Protection Rule.
Furthermore, to protect against fraud or errors, Schwab and Fidelity maintain insurance coverage through Securities Investor Protection Corporation (SIPC), a nonprofit membership corporation created in 1970 by the Securities Investor Protection Act to protect investments and increase investor confidence, along with additional coverage through private insurers.
We believe financial advisors should “eat their own cooking.” In that vein, we invest our own savings in the very same way we invest for clients, subjecting ourselves to the same market risk. We also hold our accounts through Charles Schwab and Fidelity, and have complete confidence in the safety of their brokerage platforms.