Jim MacKenzie is a CERTIFIED FINANCIAL PLANNER™ with The Partners Group. Jim can be reached at 503-241-9550. For this article and more, please visit www.tpgrp.com.
What does SIPC Insurance Cover? People are asking their financial advisors this question often these days: “Are the assets in my investment account protected by SIPC?” Even though the answer is usually “yes,” it is important for investors to understand the limits of this coverage. The Securities Investor Protection Program (SIPC) was created in 1970 as a non-profit, non-government membership corporation. Its primary role is to return funds and securities to investors if the broker-dealer holding these accounts becomes insolvent.1 However, the first important point to keep in mind is that if these securities have lost money in the market, that is not protected by SIPC. The second important point is this: SIPC is not a government agency or a regulator; it’s a non-profit membership corporation that is funded by member securities brokers.1 That means that it’s funds are limited. As a recent Wall Street Journal article pointed out, investors that have lost millions with Bernard Madoff are unlikely to see a return of their lost funds for quite some time, if ever, because the SIPC simply doesn’t have the funds to cover losses of the magnitude involved in the Madoff scandal.2 Notes the WSJ article: “SIPC’s reserve is funded by its member brokerage firms, which all pay a flat fee of $150 a year. SIPC used to charge an assessment fee based on the firm’s net operating revenues but moved to a flat annual fee of $150 in 1996 after its fund hit $1 billion. In some ways, SIPC protection looks very similar to the FDIC insurance coverage, which I covered in a previous article (see “FDIC Insurance,” Multnomah Dental Society Hotline Newsletter, August 2008). FDIC insurance will protect each unique account ownership at each FDIC member bank, up to $250,000, from losses in the event that the bank becomes insolvent or otherwise fails to meet its obligations. However, when you understand the details of what SIPC covers, you will see that it is much more limited in scope than FCIC coverage. First, FDIC covers cash assets, which are easy to value and typically do not fluctuate in the market. SIPC covers investments, and has some coverage for cash assets, but in general, investment assets fluctuate in the market and in many cases can lose 100% of their value. The SIPC does not protect investors from such market losses. A recent article posted on Forbes.com3 describes which assets are covered: “SIPC covers any missing assets up to a limit of $500,000 per account type, of which $100,000 may be claims for cash. In regard to money market funds, if your statement lists these assets as shares with a value of $1 [as is the case with many brokerage money market mutual funds] they are viewed as mutual funds and qualify for the full $500,000 coverage limit. If the money market assets are listed only in dollar figures or in a cash account, the limit of coverage is $100,000.
The article goes on to spell out the exceptions that make the limitations on SIPC coverage clear: “Obviously, SIPC doesn’t compensate investors for declines in the value of their investments, and that rule applies to money market funds that “break the buck.” Nor does the company bail out investors who are sold worthless securities. If your broker fails, SIPC will return the shares of your missing securities whenever possible, regardless of the market value. Also, coverage excludes commodities futures contracts, foreign currency, precious metals, investment contracts (limited partnerships) and fixed annuity contracts that are registered with the SEC. Certain persons associated with the brokerage—partners, officers, directors, and some beneficial owners of the firm—are not covered. Here are the key points to remember: 1) If your investments lose money in the market, those losses are not covered by SIPC. 2) Many investments, such as limited partnerships and fixed annuities are not covered by SIPC. 3) The SIPC has limited funds even to cover the kinds of losses that it is intended to cover, so they tend to be stingy in paying out claims. All of these facts point to the importance of working with investment advisors that you can trust, and that make clear to you the risks involved in your investment portfolio. Be sure to read your statements, and ask questions quickly of your investment advisor if you don’t understand something on your statement, or if you think that an investment you are in is inappropriate for you.
Footnotes: 1. from the FINRA website: http://www.finra.org/Investors/ProtectYourself/AfterYouInvest/YourRightsUnder SIPCProtection 2. “Burned Investors Won’t Find Strong Safety Net” by Jane J. Kim, The Wall Street Journal, December 17, 2008. 3. “How Safe is Your Brokerage Account,” by Jim Stack, InvesTech Research, September 15, 2008, posted on Forbes.com at http://www.forbes.com/2008/09/15
Securities and Advisory Services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC Advisory Services offered through TPG Financial Advisors, LLC, A Registered Investment Advisory Firm