- Nicholas Pihl
"Is my money safe at Schwab and TD Ameritrade?"
Given the recent collapse of Silicon Valley Bank, I thought it would be worthwhile to offer some education on the protections that Schwab (including the recently-acquired TD Ameritrade) offers individuals, particularly in the worst-case scenario if Schwab were to become insolvent.
Firstly, if Schwab failed, each customer is covered up to $500,000 per "separate capacity" (this is a fancy term for "account type"). In other words, you get $500,000 per person for each of these distinct types of accounts (and I've copied and pasted the following from the SIPC website):
"Examples of separate capacities are:
an account for a corporation;
an account for a trust created under state law;
an individual retirement account;
a Roth individual retirement account;
an account held by an executor for an estate; and
an account held by a guardian for a ward or minor.
Additional information on separate accounts may be found in SIPC's Series 100 Rules.
The following are examples of separate accounts:
Mary has an account in her name at her brokerage firm. Mary is protected by SIPC up to $500,000.
Joe has two brokerage accounts, each in his own name. For purposes of SIPC protection, Joe’s accounts are combined, and Joe is protected by SIPC only up to a total of $500,000.
Joe and Mary are married and they have a joint brokerage account which is separate from the individual accounts that they each have at the firm. An additional maximum of $500,000 of SIPC protection is available for the joint account.
Joe has a Roth account and an IRA account, at the same brokerage. Joe is protected up to $500,000 for the Roth account and up to $500,000 for his IRA account."
If none of your accounts are close to $500,000 in value, you can stop reading here and rest easy.
The second takeaway is that you can have significantly more than that $500,000 worth of investments covered by the SIPC, even if each separate account is limited to just $500,000 of coverage.
Consider that fourth example. If Joe has $500,000 in each of those accounts, he has $1,000,000 protected by the SIPC. If he also had an individual brokerage account he could have an additional $500,000 of coverage.
But of course, many clients at Schwab have more than $500,000 in each of these account types. It's not uncommon to have $1,000,000 or more in an IRA or in a taxable brokerage account. And many of Schwab's biggest clients have far, far more than that.
Let's look at how Schwab protects these people. Schwab's website states, "Customer securities—such as stocks and bonds that are fully paid for or excess margin securities—are segregated from broker-dealer securities in compliance with the SEC's Customer Protection Rule. This is a legal requirement for all broker-dealers. In the unlikely event of insolvency of a broker-dealer, these segregated assets are not available to general creditors and are protected against creditors’ claims. There are reporting and auditing requirements in place by government regulators to help ensure all broker-dealers comply with this rule."
In English, your investments are kept separate from Schwab's. Even if Schwab runs into solvency issues, your assets are not at risk. Additionally, per the Customer Protection Rule, Schwab needs to keep enough capital on hand to provide for an "orderly liquidation" in the event of insolvency. This means you would still get paid out even if Schwab fails. The assets are already there and are just paid out to you.
In the event that Schwab is unable to conduct such an orderly liquidation, Schwab also carries insurance to cover any shortfall. This is from Schwab's website, "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 $1,150,000."
A client of Schwab can reasonably keep $150 million of investments there and expect to be reimbursed for all of it. The caveat here is that it is probably unwise to hold $1,150,000 or more in cash. That money would be better kept in short-term treasuries or some other safe investment to guard against a scenario where Schwab went under.
To summarize, there are 3 levels of protection available to clients with assets held at Schwab.
The SIPC insurance of $500,000 per account type (including $250,000 of cash). If you're within these limits you have truly no worries.
The SEC Customer Protection Rule (even if Schwab is liquidated, your assets will be paid back to you in an orderly manner because your invested assets are kept separate from the bank's assets). Even if you're over the SIPC limits, you're still in good shape.
The London insurers' policies. Even if Schwab fails, AND is unable to pay out its clients, AND you have investments exceeding the SIPC limits, you're still in good shape.
Full disclosure though, does this provide a total guarantee that it is impossible to lose money due to insolvency issues at Schwab? Honestly, no. Life just does not offer guarantees against every possible doomsday scenario.
Despite that, you still have to keep your investments somewhere, and I believe Schwab offers as much safety as you can get anywhere else. And in those doomsday scenarios, where your money is truly at risk, I don't think it's crazy to expect a 4th level of protection to arise. As is currently happening at Silicon Valley Bank, I think it is likely that the government would intervene at Schwab to make all investors whole. Why? Because clients keep roughly $7 trillion (yes, trillion with a 'T') of investments at Schwab. Destruction of those assets would deliver a systemic, possibly existential, shock to the financial ecosystem, which our financial regulators and political leaders very much want to avoid.
Disclosure: My clients' assets are held at Schwab and TD Ameritrade. When selecting them as my custodial partner, I was careful to research what would happen if these institutions failed. I also made sure to think through the likelihood of that happening, and whether other institutions would be a better place for client assets.