In the midst of the financial tumult caused by the COVID-19 crisis, you’re probably thinking a lot about whether or not your investments and assets are protected. Here’s what you need to know, for both deposit accounts and brokerage accounts.

Two Categories of Risk

You already know that when you’re placing your money with any financial institution—whether depositing cash in your bank or purchasing investments—there’s inherent risk. It’s important to be able to distinguish between two high-level types of risk. (Of course, there are a number of other types of risk that come with managing your finances and investing, but we’re covering two here that are pertinent.)

The first type of risk is that of the issuing institution failing: the possibility that you incur financial loss because the financial institution itself collapses.

The other type of risk relates to investments: the possibility of financial loss because an investment’s value declines, or because the market fails.

Let’s look at some of the basics of FDIC and SIPC coverage, and provide some perspective in light of the current crisis.

The Basics: FDIC and SIPC

FDIC (Federal Deposit Insurance Corporation) insurance covers your assets that are in deposit accounts (such as checking and savings). SIPC (Securities Investor Protection Corporation) insurance covers your assets in a brokerage account. The two types of coverage work very differently.

What the FDIC covers:

This federal agency protects you against losses in your FDIC-insured bank accounts. It’s insurance against the failure of the financial institution itself.

  • The current FDIC insurance limit is $250,000 per account holder per insured bank for deposit accounts (checking and savings accounts).
  • Protection is also offered for up to $250,000 for certain retirement accounts held in an FDIC-insured bank. These include some IRAs and self-directed defined contribution plans.
  • The FDIC also covers certificates of deposit (CDs) and money market accounts.
  • These limits apply to principal and accrued interest.

What the FDIC does not cover:

FDIC insurance does not cover Stocks, Bonds, Mutual funds, Money Market Mutual Funds, Life Insurance Policies, Annuities, or Municipal Securities. This is true even if you purchased these types of investments from an FDIC-insured bank.

What the SIPC covers: 

The SIPC is a nonprofit membership corporation that protects clients of SIPC-member broker-dealers in case the brokerage firm fails. SIPC coverage limits are up to $500,000 per customer.  Many of the custodial firms have additional private coverage in addition to this.  Make sure you know what your custodian offers.

What the SIPC does not cover:

The SIPC does not cover declines in investment value for any of the above mentioned products. It also does not cover commodity futures, investment contracts, or fixed annuity contracts that are not registered with the SEC.

Back to Risk: What Should You Do Now?

You may be wondering if you should move your cash to an FDIC-insured account or a Money Market Mutual Fund. The answer, of course, will depend on your individual situation, and it’s best to discuss with your financial advisor.  We believe using either can be a much better option than keeping large sums of money in bank accounts earning very low rates.  If you intend on having cash in your brokerage account, Money Market Mutual Funds can be a good option.  When in a volatile market, like we currently are in, having cash in a Money Market Mutual Fund inside your brokerage account will limit the amount of time needed to transfer cash around in order to get it invested into more risky assets in your portfolio.

Many investors have money in Money Market Mutual Funds, which, as we’ve pointed out, are not FDIC-insured.  If you’re invested in Money Market Mutual Funds, you should understand which type of Money Market Mutual Fund you own:

  • Investments in each Money Market Mutual Fund are different.  Some invest in commercial paper and others invest in government backed securities, like t-bills.  There are varying degrees of risk and yield depending on the type of Money Market Mutual Fund you are invested in.  Generally, the higher the yield the more risk the underlying investments have.
  • With Money Market Fund Reform, some Money Market Mutual Funds have constant Net Asset Value and others have Variable Asset Value.
  • Some funds have possible Liquidity Fees and Redemption Gates.
  • If the fund is a Government Money Market Fund, it will generally invest in Treasury bills (T-bills) and other assets that are collateralized by the US Treasury securities.  These securities are backed by the full faith and credit of the U.S. Treasury. In our view, this is every bit as secure as FDIC insurance.

Another great option for cash outside of your brokerage account is an online High Yield Savings Account offered at many FDIC insured financial institutions (American Express National Bank, Capital One Bank and Barclays Bank, just to name a few).  Many of them offer VERY attractive yields in order to gain a new customer that they can market other financial products to.  If you don’t mind the occasional marketing campaign, and you are comfortable with banking online, then these can be very good options.  These accounts are FDIC insured up to the amounts we discussed previously.

Let’s talk. The advisors at Ironwood Wealth Management are here to help you devise a solid, personalized financial plan and find out what the right mix of investments are for you. Set up an appointment today.