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Before posting this question I did read Is SIPC coverage on cash as strong as FDIC?, but the answer did not seem to make much sense/lacked many answers to help clarify for me.

I was doing some reading online, and from what I understand, they are basically the same thing, except one covers bank accounts, the other covers brokerage accounts (with SIPC covering 500,000 in total with 250,000 of it as cash).

I recently opened a brokerage account, and I noticed none of the companies (even big ones) have FDIC insurance. Even if banks have a brokerage, the money you have there would not be covered under the FDIC policy since it is a brokerage account and not a bank account.

It would also seem that since no brokerage has FDIC, that they are all equally at risk unless you put it into a high-interest savings account where you can have the backing of FDIC. I saw on a couple of the firms I looked up in their consumer report that complaints about not having FDIC. But this seems illogical since brokerages won't have FDIC in general.

So this leads me to wonder what the big deal is about not having FDIC if all brokerage accounts (at least the ones I looked at) have SIPC since they seem to cover things equally depending on the account type? Maybe my perception is really off, and I apologize. I am still new to personal finances and trying to learn.

Ben Miller
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ggiaquin16
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4 Answers4

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There is a subtle difference.

In an FDIC insured bank account, you are guaranteed to get all of your money back out. If you put $1000 into your bank account, you are guaranteed to be able to get at least $1000 back out when you want. The value of the account (in dollars) can never go down, for any reason.

When you put money into a brokerage account, cash is typically invested in a money market fund. Money market funds are considered very safe investments, with low risk of loss (and a corresponding low rate of return). However, it is possible for the value of a money market fund to go down, and SIPC insurance does not cover that.

What SIPC does cover is any sort of shenanigans that a broker might play on you. If they screw up and delete your account, or give your money to someone else, or close up shop and head to Grand Cayman, SIPC ensures that you will get your money back. But it does not cover investment losses.

Ben Miller
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While you are correct that no broker-dealer ever qualifies for FDIC and it could be sufficient for customers to know that general rule, for broker-dealers located at or 'networked' with a bank -- and nowadays many probably most are -- these explicit statements that non-bank investments are not guaranteed by the bank or FDIC and may lose principal (often stated as 'may lose value') are REQUIRED; see http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9093 .

dave_thompson_085
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Some brokerages do offer a service called "bank sweeps", which move your uninvested cash deposits into an FDIC-insured account at a partner bank (or several banks, to increase the insured amount).

Yosef Weiner
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There is one way in which FDIC and SIPC are not equivalent as far as I could get a Fidelity counter rep not to answer but to carefully dodge.

Question: Unlike a bank, which can't touch my principal or earned interest below the $100k protection level, can a brokerage money market fund in a financial crisis situation invoke negative interest against my SIPC balance (i.e., take my money to hedge against its meltdown) against which I am not protected? Answer: Well, that would never happen; for interest rates to be negative things would have to be very bad.

Indeed they would, imagine that. Not a reason not to trust SIPC, just a reason to know to trust it less in a very bad situation.

RAS
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