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When it comes to your wealth, you want reassurance that your money is safe and protected.
While bank balances are insured by the Federal Deposit Insurance Corporation (FDIC), investments held in a brokerage account are covered by the Securities Investor Protection Corporation (SIPC). It protects investors in the unlikely event that their brokerage firm fails. However, certain rules and conditions apply—and your investment earnings are not insured.
SIPC insurance can offer some peace of mind, but it doesn't eliminate risk altogether. Here's a closer look at how it works.
What Is SIPC Insurance?
Like FDIC-insured bank accounts, SIPC-insured brokerage accounts protect your investments in certain situations. These accounts are reserved for brokerage firms that are SIPC members, which includes pretty much all brokerages registered with the Securities and Exchange Commission (SEC). If you read the fine print on your brokerage's website, you'll likely see some indication of SIPC membership. Non-members are required to disclose that information to their customers. If this is the case with your brokerage, you may want to consider switching. Otherwise, your assets could be vulnerable if the firm fails.
You can check the SIPC database to see if your brokerage is an SIPC member.
When SIPC Insurance Will Protect Your Investments
SIPC insurance generally kicks in during the following situations, according to the Financial Industry Regulatory Authority:
- A brokerage firm goes bankrupt or becomes insolvent: If a brokerage firm falls on hard times and is unable to return customer assets, SIPC insurance should get involved to make things right. Here's an example: It isn't uncommon for broker-dealers to partner with a clearing firm to execute customer orders. The clearing firm serves as a holding place for customer assets, which can include securities and cash. If they end up collapsing, SIPC insurance will step in to return missing funds.
- Instances of unauthorized trading: If a brokerage firm uses your account to make unauthorized trades, you should be protected by SIPC insurance. Things get fuzzy, though, if your account gets hacked. In this situation, your protection depends on whether the hack played a part in the brokerage's liquidation.
It's worth noting that SIPC insurance does not protect against regular investment losses. If your securities decline in value, don't expect the SIPC to bail you out. The same goes for investors who purchase stocks or other securities that end up underperforming—even if an advisor recommended you do so.
What SIPC Insurance Covers
The SIPC protects cash and securities in a brokerage account. The firm holding the account must be an SIPC member. Protected assets include:
- Cash
- Stocks
- Bonds
- Treasury securities
- Mutual funds
- Money market mutual funds
- Certificates of deposit
Securities and cash in your brokerage account are protected up to $500,000. Half of that amount can cover missing cash.
What's Not Covered
- Currency
- Commodity futures
- Fixed annuity contracts
- Unregistered investments
FDIC vs. SIPC Insurance
Both SIPC insurance and FDIC insurance can protect consumers from financial losses. However, they're structured a little differently.
| SIPC Insurance | FDIC Insurance | |
|---|---|---|
| Designed for | Brokerage accounts containing cash and other securities that are held with an SIPC member. That can include stocks, bonds, mutual funds, Treasury securities and more. | Deposit accounts held by FDIC members. That can include checking and savings accounts, money market accounts and certificates of deposit. |
| Covered events | When a brokerage account becomes insolvent or goes bankrupt. Instances of unauthorized trading are also covered. | When a bank fails and is unable to return financial assets to customers. |
| Coverage limits | Up to $500,000 per consumer, half of which can be used for cash | Up to $250,000 per depositor, per insured bank account |
| How to get reimbursed | Customers will generally receive a claim form from the trustee supervising the liquidation. If you don't receive it, be sure to file one yourself to ensure coverage. | No action is necessary. Coverage will automatically kick in up to the covered amount. |
How Can You Protect Yourself From Investment Losses?
Investment losses are always a possibility. There's no foolproof way to avoid them, but there are steps you can take to help mitigate investment risk.
- Revisit your asset allocation. This refers to the way your investment portfolio is structured. A balanced portfolio reflects a healthy mix of different assets. That includes both high-risk and low-risk investments. Diversifying in this way can help you keep an even keel if certain securities decline in value. Market volatility comes with the territory, but revisiting your asset allocation is meant to keep you aligned with your long-term financial goals and risk tolerance.
- Consider low-risk investments. Part of diversification is sprinkling low-risk investments into your portfolio. Returns are typically lower when compared to riskier investments, but they can provide reliable returns you can count on. This can include Series I bonds, certificates of deposit, money market accounts and more.
- Work with a financial professional. The right financial advisor can provide customized investment advice. They'll usually take your risk tolerance, financial goals and retirement timeline into account, then make personalized recommendations from there. Robo-advisors can be a cost-effective alternative. They use algorithms to manage your investment portfolio.
The Bottom Line
Most brokerage firms are insured by the SIPC. This protects investors in the unlikely event that the firm fails. Consumers need to file a claim with the SIPC to receive reimbursement, but regular investment losses aren't covered.
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