When it comes to your finances, few things—if any—are more important than security. Whether it’s your nest egg, your legacy, or simply the funds in your checking account, you want to make sure that it’s protected against anything out of your control.

Unfortunately, the financial world, like most things, is never completely safe or secure. Entering it means accepting that there’s always at least the tiniest sliver of risk involved. There’s always the chance that a number of outside factors could converge to threaten the wealth you built. And it’s possible that, under the right (or wrong) circumstances, banks or other financial institutions can fall victim to these threats.

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How Do Banks Fail?

It’s uncommon, but bank failures do happen. Banks fail when they can’t meet their financial obligations to creditors and depositors, either because the bank has become insolvent (meaning its liabilities are greater than its assets on hand) or it doesn’t have enough liquid assets to be able to make any necessary payments. In the event of either of these circumstances, banks can be closed by federal or state regulators, depending on the type of bank.

There are many reasons why a bank could fail, and while there are a few exceptions (like the Great Depression and the Global Financial Crisis of 2008), a bank failure isn’t necessarily indicative of the health of the entire banking industry or the economy as a whole. Though bank failures can certainly lead to alarming headlines and general unease, it’s important to remember that the government has protocols in place to protect customer assets held within these institutions.

What Is the FDIC?

The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that insures customer deposit accounts in U.S. banks—like checking or savings accounts—in the event of bank failures. The standard FDIC insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

If you open a deposit account in an FDIC-insured bank, you do not need to purchase insurance—you are automatically covered. However, FDIC insurance does not cover stocks, bonds, mutual funds, crypto assets, life insurance policies, annuities, municipal securities, or safe deposit boxes or their contents.

What Is the SIPC?

The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation created in 1970 to protect the clients of brokerage firms. Members of the SIPC include all brokers and dealers registered under the Securities Exchange Act of 1934, all members of securities exchanges, and most National Association of Securities Dealers (NASD) members.

The SIPC protects against the loss of cash and securities—such as stocks, bonds, Treasury securities, certificates of deposit (CDs), mutual funds, money market mutual funds, and certain other investments—held by a customer at a financially troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. Most customers of failed brokerage firms are protected when assets are missing from customer accounts.

However, the SIPC does not cover insurance policies, crypto assets, commodities and futures contracts (or affiliated options), foreign exchange contracts, mutual funds held outside the brokerage, or investments not registered with the Securities and Exchange Commission (SEC), such as private equity.

Increased Asset Protection Through Custodians

While the FDIC and SIPC provide bank customers with a high level of protection, not all banks are created equal. At Wealth Enhancement Group, we partner with “custodians” or “custodian banks” that hold onto client assets on our behalf and provide an extra layer of security against loss or theft.

Depending on where the assets are held, these custodian partners are covered by both FDIC insurance and SIPC protections, meaning assets that fall under the previously mentioned conditions are insured in the unlikely event of bank failure.

Additional Safeguards

Custodians may also have additional measures in place to safeguard client assets beyond FDIC/SPIC protections and internal investment/lending philosophies. For example, Schwab’s coverage with Lloyd's of London and other London insurers, combined with SIPC coverage, provides protection of securities and cash up to an aggregate of $600 million and is limited to a combined return to any customer from a Trustee, SIPC, and London insurers of $150 million, including cash of up to $1.15 million. This additional protection becomes available in the event that SIPC limits are exhausted.

National Financial Services (NFS) from Fidelity also provides additional account protection beyond SIPC. As with Schwab, the excess of SIPC coverage will be used only when SIPC coverage is exhausted. Total aggregate excess of SIPC coverage available through NFS's excess of SIPC policy is $1 billion. Within NFS's excess of SIPC coverage, there is no per-customer dollar limit on coverage of securities, but there is a per customer limit of $1.9 million on coverage of cash awaiting investment. This is the maximum excess of SIPC protection currently available in the brokerage industry.

However, like SIPC protection, excess of SIPC protection does not cover investment losses in customer accounts due to market fluctuation. It also does not cover other claims for losses incurred while broker-dealers remain in business.

Figure 1. Extra Custodial Protections by Account Type

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Considerations for Margin Investors

A margin account is a brokerage account where the broker-dealer lends the investor cash so they can buy stocks or other securities. Then, the broker-dealer uses the account and all securities within it as collateral against the loan they handed out to the investor.

Margin accounts receive the same protection under SIPC relative to non-margin accounts, and what is owed to a customer is based on the customer’s “net equity.” Net equity generally is the cash and securities owed to the customer by the brokerage firm minus any indebtedness owed by the customer to the brokerage firm.

However, accounts not on margin hold securities in segregated accounts, which should be unaffected by a bank failure. Meanwhile, accounts with margin have securities held in commingled accounts from which the broker-dealer can lend. Hence, securities that are lent away may become more problematic to retrieve in the case of a bank failure.

In addition, margin investors, by definition, are subject to losses greater than invested principal, so additional concern is warranted. In the case of securities getting marked to market, clients may have to provide additional cash or securities if the maintenance margin is breached.

How We Protect Your Assets

At Wealth Enhancement Group, we understand that you worked hard for your money, and you don’t want anything to happen to it. While there’s always some risk with investing, we believe that the assets you keep with us should be as safe as possible, regardless of the economic climate.

In addition to the safeguards in place to protect your assets, we also employ the latest cybersecurity measures to ensure your personal information is just as protected as your money. Our team actively reviews and modifies our policies and procedures to respond to new threats and adapt to changes in technology.

Our mission—our purpose—is to provide our clients with the utmost care and quality of service. We want to simplify your financial life and leave you feeling confident in the decisions you make and the financial goals you’re working to achieve. And we understand that much of that confidence comes from feeling that your finances are safe and secure. If you have further questions or would like to speak with one of our financial advisors, please don’t hesitate to reach out.