The Layers of Safeguards Provided by FDIC Insurance, SIPC Insurance, and Fidelity

By Zack Gutches, CFP®, CPA & Matt Howell, AIFA | Apr 06, 2023 |

When the banking sector encounters turbulence, many individuals start to wonder how safe their savings and investments are. In this article we’ll share the various safeguards in place that protect our clients.

What does FDIC insurance cover? 

FDIC, or Federal Deposit Insurance Corporation, is a government agency created in 1933 to protect depositors in the event of a bank failure. FDIC insurance covers up to $250,000 per depositor, per insured bank for deposits in checking, savings, money market deposit accounts, and CDs.  

The FDIC is funded by assessments on member banks, with approximately $8.3 billion of funds coming in from over 5,000 member banks in 2022 alone. As of December 31, 2022, the FDIC Deposit Insurance Fund balance totaled to over $128.2 billion. Since the FDIC’s inception ninety years ago, no depositor has lost any money on insured funds as a result of a bank failure. You can use this link to find out if your banking institution is an FDIC-insured bank. 

For assets managed by Brighton Jones at Fidelity, we primarily utilize money market funds for our client’s cash positions. It’s important to note that any money in a money market fund does not fall under FDIC-insurance, but rather SIPC insurance (which we cover in greater detail below). Money market funds are fixed income mutual funds that invest in debt securities with short maturities and minimal credit risk, in order to get a more favorable yield on what would otherwise be cash.  

While there are many different money market fund options, we use the most conservative money market funds available, which invests in short-term debt instruments which are backed by the full faith and credit of the US Treasury. We do not use Prime money market funds given their holdings in commercial paper (which have longer maturities), ability to trade below their Net Asset Value (NAV), and have the ability to temporarily suspend redemptions during times of financial distress (such as in 2008 and March 2020). We do not feel that the nominal incremental yield on Prime money market funds are worth these added risks. As of the time of this writing, the primary money market funds we use for managed accounts yield approximately 4.46%, have a weighted average maturity of two days, and are available same-day for when clients are drawing money from their portfolio. While our approach to utilizing money market funds over the years has not changed, the opportunity cost of cash reserves in checking and savings accounts has risen over the past year with increases in interest rates, and it is important to be mindful of the FDIC-insurance limits, as stated above.  

Investment Protections through SIPC Insurance 

Investments and securities are covered by the Securities Investor Protection Corporation (SIPC), which is a non-profit organization established by Congress in 1970 to protect investors from the loss of cash and securities in case of a brokerage firm’s failure. The SIPC insurance covers up to $500,000 for each customer for cash and securities lost due to a brokerage firm’s insolvency. As is reasonable, SIPC insurance doesn’t cover losses incurred from the decline in the market value of your investments. Historically, in the event of a brokerage firm failure, client investments are merged with another brokerage firm, resulting in minimal administrative impact to customers.  

During the collapse of Lehman Brothers in 2008 (the largest bankruptcy in U.S. history), their brokerage customer assets were segregated from those of the investment bank.  Lehman Brothers Asset Management merged into Neuberger Berman and continued to conduct business as usual during the collapse of Lehman. Customer assets were not subject to the claims of creditors and no customers lost any assets. 

According to SIPC, most broker-dealer failures happen with no securities missing.  Since their inception over 50 years ago, 99% of eligible investors have received their investments back from the failed brokerages in cases that the SIPC handled. 

Fidelity’s Additional Insurance Coverage  

In addition to SIPC protection, Brighton Jones’ custodian, Fidelity, offers total aggregate excess coverage up to $1 billion. Within Fidelity’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. For context, this is the maximum excess of SIPC protection currently available in the brokerage industry.  

It’s also worth noting that Fidelity is not a bank. While banks utilize a portion of customer deposits to make loans and outside investments, client assets at Fidelity are held in segregated accounts. The SEC’s Customer Protection Rule safeguards customer assets like these by preventing brokerage firms from using customer assets to finance their own proprietary businesses.  Fidelity does not use client assets to provide loans to others, for proprietary trading, hedge fund management, or any other use. 

In Conclusion 

While headlines often provoke a sense of angst and calls for major, swift actions, we continue to feel extremely confident in our approach to effectively manage cash-type assets as well as the safeguards in place through various organizations such as the FDIC, SIPC, and Fidelity. 

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