Excess SIPC Insurance: Are Your Investments Safe?

By |2021-10-13T10:59:47-08:00October 9th, 2021|Wealth Management Resources|

Time to Read: 8 Minutes

As a high-net worth individual, you’ve worked hard, made smart investments, and followed a sound strategy to create a significant portfolio. But as we all know, making money is just one part of amassing wealth—keeping it is just as important. 

Asset protection for affluent families is especially critical because it requires a strategy of its own. For many investors, SIPC (Securities Investor Protection Corporation) insurance is enough to protect against the risk of default by their custodian. But for affluent families like yours, even SIPC may not provide enough protection.   

We cover the basics of standard SIPC insurance in the sidebar, but let’s walk through the additional options you need to consider to cover the risk of default over and above the limits of SIPC. 

How to get more protection 

While the SIPC is a reliable protection against failing brokerage firms, it does not fully meet the needs of affluent families and individuals whose assets exceed the limits set by the SIPC. To safeguard your wealth, consider working with a team like Brown Wealth Management that partners only with brokerage firms that offer generous excess SIPC coverage to all clients.  

What is excess SIPC coverage? 

Excess SIPC coverage is private insurance that goes beyond the SIPC limits, often by many multiples.  This insurance is purchased by the custodian and applies to all customers. Unlike an extended warranty on your refrigerator, for example, this coverage is made available to all customers without any additional fee or opt-in. Excess SIPC insurance provides hundreds of millions or even a billion dollars in additional protection for all customers of the brokerage firm that holds it.  

How can I get excess SIPC coverage? 

Many large custodians and broker-dealers offer excess SIPC to all customers. Each company provides different limits of coverage and may have per-customer maximums, so we recommend speaking with your financial institution to understand how particular protections apply to your investments. Our team can help you secure excess coverage with one of our partner firms, all of which offer generous excess coverage to clients.  

What else can I do to protect my wealth? 

A bankrupt custodian, while a serious risk, is very rare.  Other major threats, most notably market risk and identity theft, are not covered by SIPC insurance and pose a more costly risk to affluent families.  We are uniquely focused on these challenges and can help you avoid unnecessary loss from such threats.  

Back to the Basics

What is SIPC insurance coverage?2021-09-29T09:06:59-08:00

Congress created SIPC insurance to protect consumers against the loss of assets from a bankrupt brokerage firm unable to meet its obligations. In its five decades of operation, 99% of those eligible have recovered their investments, giving investors confidence that their money will remain safe no matter what happens to their brokerage firm.

What is covered by SIPC?2021-09-29T09:06:55-08:00

SIPC insurance covers the loss of cash and most investments at a member brokerage firm up to set limits. This includes cash held for investment, money markets, stocks, bonds, ETFs (Exchange-Traded Funds), mutual funds, notes, and other registered securities.  

Bank accounts, such as savings, checking, and CDs, are protected separately through FDIC (Federal Deposit Insurance Corporation) insurance.  

Not every loss is covered by SIPC insurance—namely market fluctuation and identity theft—which we discuss in the article above. 

SIPC limits of coverage for 20212021-09-29T09:06:51-08:00

SIPC covers securities valued at up to $500,000 per customer, including up to $250,000 in cash securities. As explained below, these limits apply separately to each account type. Investors with multiple accounts may receive more protection.  

Does SIPC cover multiple accounts?2021-09-29T09:06:47-08:00

SIPC does cover multiple accounts, but with a caveat—the accounts must be of a different “type” to be covered up to the set limits. These coverage limits are based on a principle called “separate capacity,” which refers to accounts held in different capacities. Categories of separate capacity include individual, joint, IRA, and corporation, among others.  

For example, an investor who holds $500,000 in her individual name, $500,000 in a joint account with her spouse, and $500,000 in her IRA will be fully covered in all three accounts because they are in separate capacities. Accounts of the same type, however, are combined to meet the limits. If our example investor opens another account with $500,000 in her individual name, the assets won’t be covered under SIPC insurance because the total amount in her individual name will be $1,000,000, which is more than the $500,000 limit.  

For accounts worth more than the SIPC limits, excess SIPC insurance, which we describe in the article above, can provide additional protection.  

What happens to a claim above these SIPC limits?2021-09-29T09:06:42-08:00

Even with separate capacity, many affluent families have investment portfolios far exceeding the SIPC limits. In these situations, claims will first be paid out up to the limits. Those with accounts exceeding the limits will have a claim on the brokerage firm’s assets distributed during the bankruptcy liquidation process.  

History has shown that the SIPC process works, even with large cases. After Lehman Brothers Inc. filed for bankruptcy in 2008 (the largest filing in U.S. history), the SIPC closed the case six years later with an impressive 100% payout to customers. The case with MF Global Inc., which filed in 2011, was resolved after five years with 100% to customers and commodities investors and 95% to creditors.  

Even with this strong track record, the liquidation process can be lengthy. This can be problematic for retirees relying on their portfolio to fund current living expenses. To solve this dilemma, many brokerage companies offer excess of SIPC coverage to their clients. 

Is SIPC insurance safe?2021-09-29T09:06:37-08:00

After a half-century of operation, SIPC has proven to be reliable for financial customers.  

What backs SIPC insurance?2021-09-29T09:06:32-08:00

SIPC is backed by the SIPC Fund with contributions from member brokerage firms. The SIPC Fund currently stands at $3.5 billion, and since 2020 has been targeting additional contributions to reach $5 billion. In addition, the U.S. Treasury provides a generous $2.5 billion line of credit. In its 50 years, the SIPC has never needed to tap this line or use taxpayer money to support consumers. 

Is SIPC backed by the government?2021-09-29T09:06:27-08:00

The SIPC is not a government agency or regulator. It is a non-profit organization created under the Securities Investor Protection Act to protect consumers from financially insolvent brokerage firms. Mentioned above, the SIPC is financially backed by the U.S. Treasury’s line of credit.  

What is the track record for SIPC? How often does it bring cases?2021-09-29T09:06:22-08:00

The SIPC has earned an impressive track record. Since its founding in 1970, the SIPC has returned 99% of eligible customer claims. The SIPC has engaged in 330 proceedings, which is less than 1% of the 40,000 broker-dealers that have been SIPC members over its history. One-third of these proceedings fell between 1971 and 1974. This spike in cases resulted from difficult years in the late 1960s when hundreds of broker-dealers were merged, acquired, or forced out of business.  

In recent decades, insolvency of a custodian has become a rare occurrence. The average new cases between 2009-2019 was less than one each year. As of 2020, only three cases with the SIPC remain open, most notably Lehman Brothers and Madoff Investment Securities.  

At Brown Wealth Management, we partner with our clients to help them live richly – in alignment with your values and intentions. Through our 3-step process, we take prospective clients through a powerful exercise to understand their goals and values and create a draft financial plan to achieving them. We dive deep into every area of wealth management, including estate and tax planning, to check for blind spots and design creative solutions. Throughout this process, we partner closely with your legal and tax professionals to provide coordinated financial advice.   

Market risk 

It is crucial to understand how much risk you are taking in your investment portfolio. Losses from a drop in the stock market are much more likely to be a threat to your wealth than an insolvent brokerage firm. As a result, our team takes every step to help you understand your total investment risk and ensure it’s in alignment with your financial plan.  

A common cause of sudden, undue loss from market fluctuation is holding a concentrated position in just a single stock or industry. This doesn’t just apply to holding a company’s stock directly. Even with multiple mutual funds or ETFs (Exchange Traded Funds), investors may be surprised to find that their portfolio contains too much in one stock or industry, such as technology or financials.   

Over time, an account might also drift away from your risk tolerance. During a stock market rally, stocks increase in value and become a larger percentage of an account. This leads to sharper swings when the market corrects, catching an investor by surprise.   

To address these concerns, our team models risk in multiple accounts and financial institutions through Riskalyze. A software program designed to model investment risk, Riskalyze estimates the greatest loss you could experience over six months, 95% of the time.  While risk modeling is not a perfect science we believe this can help you to make informed decisions when it comes to asset allocation.  

If you haven’t already, you can take a Riskalyze sample quiz here. 

We also examine your investment portfolio in the context of your entire financial plan in an attempt to avoid risking more than necessary. We help you decide on a roadmap for reducing investment risk, such as rebalancing, protective options contracts, exchange funds, and more.  

Identity theft 

Another key area where we are all vulnerable is identity theft. Today’s cyber criminals have become increasingly sophisticated in personalizing attacks for each victim. Using social media, your email history, and other sources, they can craft attacks using the names of your employer, place of worship, and family members.  

At Brown Wealth Management, we are aware of this risk and take precautions to protect you. We endeavor to build processes based on the latest research to stay ahead of hackers and keep you safe. A boutique team that knows you personally, like ours, provides additional protection against scammers.  

Guarding against identity theft also includes keeping your personal information out of the hands of scammers. Here are a few “common sense” tips to keep your information safe: 

  • Freeze your credit at all major reporting agencies (Experian, Equifax, Innovis, and TransUnion) to prevent new accounts from being opened in your name 
  • Don’t give personal information to unsolicited callers 
  • Don’t reuse the same password at multiple websites; consider a password management software to keep your login information secure 
  • Don’t click on links or attachments from suspicious senders, or send personal information over email 
  • Use multifactor authentication (a separate code by email or text message) whenever possible, particularly for logins to financial institutions  

Need help? 

There are multiple precautions that affluent families like yours should consider to protect your wealth. If you are concerned about the safety of your investments, please contact our office today. We will be happy to discuss how we can help protect your funds and provide you and your family peace of mind.  

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Investment advice offered through Stratos Wealth Partners, Ltd., a Registered Investment Advisor DBA Brown Wealth Management.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.