Schwab and the SIPC have you covered
With current market conditions resulting in large losses at Merrill Lynch, UBS, and the recently bailed out Bear Stearns, investors are understandably wary about the financial condition of their brokerage firm. For this reason MCS feels it’s important to address two questions that may be on your mind. First, what is SIPC insurance and what does it do? Second, is Charles Schwab & Co. financially sound?
SIPC stands for Securities Investor Protection Corporation. It is a private company, chartered by Congress to protect investors by returning their securities and cash if their brokerage firm were to go bankrupt or insolvent. If a brokerage firm closed because of financial difficulties and customer assets went missing, the SIPC would work to return the customer’s cash and financial securities. But only to certain limits.
The SIPC covers cash up to $100,000 and securities up to $400,000, for a total coverage of $500,000. Note that money market mutual funds, which is what the vast majority of our clients hold as “cash,” is actually a security and falls under the $400,000 limit. But what about clients with accounts in excess of $500,000? Most brokerage firms, including Schwab, have bought third-party insurance on all accounts in excess of the $500,000 limit. In the case of Schwab, they have purchased insurance through Lloyd’s of London so that each client is covered for up to $1 million for cash and $150 million for securities; the aggregate for all Schwab clients is $600 million.
So how likely is Schwab to fail? Not very. As of the end of 2007 they had only 19% long-term debt to total capital, far below Bear Stearns’s 85%, which is what made toppling that giant so easy.
Unlike most brokerage firms, Charles Schwab & Co.’s finances are improving: it’s S&P rating was raised February 13, 2008 to A/A-1 from A-/A-2. (Please call for a copy of the S&P report.) If that does not give you confidence, know that your accounts are covered by two layers of insurance.