Recently a reader sent me a message:

“As my retirement savings is increasing, I am wondering if I should spread out my savings to multiple brokerage firms in order to spread out the insurance coverage.  

I currently have my IRA, my Roth IRA, my wife’s IRA, my wife’s Roth IRA, and a Traditional Brokerage account ALL with Vanguard and (I’m) starting to wonder if that is a smart strategy?

Or should I break out our retirement savings into other large low cost brokerage services to take advantage of SIPC.”

Let’s explore what SIPC is, what protections it provides, and if it makes sense to spread your dollars amongst brokerages to take advantage of it. Longtime Vanguard customers will want to make sure to read to the end!

What is SIPC?

SIPC is the Securities Investor Protection Corporation. It is a non-profit corporation, not a government entity. It provides limited protections against the loss of cash and securities held at SIPC-member brokerages.

FDIC vs. SIPC

At first glance, this sounds and feels similar to the FDIC, Federal Deposit Insurance Corporation, that insures bank deposits. There are a few key differences.

The FDIC is actually insurance, up to defined limits, of bank deposits at insured institutions. It is backed by the “full faith and credit of the United States government.” It was established in 1933 to promote confidence leading to stability of the U.S. financial system.

To the reader’s question, SIPC is not insurance. From the SIPC website: 

“SIPC protection is limited. SIPC only protects the custody function of the broker dealer.…”

What Protection Does the SIPC Provide?

SIPC protects against the loss of cash, up to a limit of $250,000, and securities, up to a limit of $500,000, if they are held at a SIPC member brokerage. The list of members is extensive, including all of the largest brokerages where you are most likely to house your investments.

The SIPC website explicitly states that “SIPC protection is limited.” It only protects the custody function if troubled member brokerages are being liquidated.

Cash is defined as “cash in a brokerage firm account from the sale of or for the purchase of securities.” Note that money market funds, which you may consider “cash” in your asset allocation, are actually defined as securities. Also, many brokerages automatically sweep any proceeds to a bank account where it receives FDIC protections. Therefore, it is highly unlikely that anyone reading this blog is deriving much, if any, benefit from SIPC cash protections.

Securities are essentially stocks, bonds, mutual funds, ETFs, options, warrants, etc. that you may hold as investments.

Protections are provided on the basis of “separate customer” capacity. For example, if as the reader who sent this question, you held a joint brokerage account, a Roth IRA and a traditional IRA for each spouse, you would have separate protections up to the $500,000 limit on each account. 

Note that a joint account receives the same $500,000 coverage total. It does not cover each individual for $500,000.

What Is Not Protected by the SIPC?

It is as important to note what is not a security and thus not protected by SIPC coverage, including: 

• Currencies (including cryptocurrencies),
• Fixed annuities (which are insurance products, thus not securities),
• Unregistered investments such as limited partnerships,
• Commodities or futures contracts,
• Any rights, contracts, etc. to buy or sell any of the above.

An SEC bulletin notes the list of events the SIPC does not protect against. It includes, but is not limited to:

• The decline in a security’s value,
• Non-custody related fraud,
• Losses due to a broker’s bad advice or claims that authorized trades were inconsistent with your investment values.

Should You Diversify Your Holdings to Maximize SIPC coverage?

Returning to the reader’s question, the answer is….probably not.

Before SIPC limits matter, we need to know how much is in each of his household’s accounts. Having 5 different accounts all held at one brokerage is not necessarily a risk.

He could theoretically have $2 million ($400,000 X 5) and still be well under the limits of SIPC coverage. You have to consider the balances account by account to see if you have any amount at risk.

Only if you have any accounts over the $500,000 limits do you need to consider diversifying amongst brokerages to maximize SIPC coverage.

Even then, there is likely little benefit to taking the effort and adding complexity to your portfolio. This is especially true if you utilize one of the large brokerages.

Both Fidelity and Schwab clearly note on their website that beyond SIPC coverage, they have purchased additional insurance protection of your investments. Vanguard does not explicitly state how much coverage they provide above and beyond SIPC limits on their website, but Investopedia reports Vanguard carries “insurance that protects clients beyond the limits of SIPC coverage.”

There are many risks we need to be aware of when building and managing a portfolio. SIPC coverage is generally not one we need to pay much attention to…..unless we do.

Special Considerations For Vanguard Customers

In recent years, Vanguard has been transitioning away from their old platform on which you could only purchase Vanguard mutual funds to a full brokerage platform. They have been encouraging, but not requiring, all customers to transition to the full brokerage service.

I uncovered an interesting note related to SIPC coverage at Vanguard in researching this post. Vanguard’s website states: “If your account has an 11-digit account number, it’s a mutual fund-only account, which exists on our old platform and isn’t covered by the SIPC.”

If you are a longtime Vanguard customer who has not transitioned to the full brokerage service, this would be one exception where you should take action in order to have additional protection of your investment accounts.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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