All the talk is about the current banking crisis. And whether or not your money is safe in these accounts.

But what about your brokerage account? Is it safe? What safeguards are in place for that? What protection do we have as account holders?

Well, those are the questions I recently tackled in a video for my Capital Wealth Letter subscribers. And today, I’d like to share it with you. You can watch the video (simply click the play button) or read the transcript below.

Hey everybody, my name is Jimmy Butts with Capital Wealth Letter and I wanted to shed a little light on a corner of the market that’s not getting a lot of attention, but has many folks asking a lot of questions.

That’s our brokerage accounts. I’ll be talking specifically about Charles Schwab today, because for one it is publicly traded so we can dive into its financials, and for two it is the second largest investment brokerage in the United States behind Vangaurd.

I’ve also seen Charles Schwab being floated around as one of the next banks that could be in serious trouble.

While I don’t bank there, I have several brokerage accounts there, and I wanted to discuss why I’m not worried about Charles Schwab and my brokerage accounts even if it fails.

So, let’s walk through this…

I am going to start at Charles Schwab’s investor relations page.

As you can see here, the company has $7.38 trillion in assets under management.

Now let’s head over to its 10-k, where I have the balance sheet pulled up.

Charles Schwab Balance Sheet

Under assets, you can see that it shows total assets at $551 billion.

This raises the question, where’s the other $6-odd trillion that Charles Schwab claims to have.

The answer to that reveals the fundamental difference between a brokerage account and a bank account.

You see, when we put our money in a brokerage account to buy stock like Apple or Amazon. That money does NOT show up on Schwab’s balance sheet. That is not money that Schwab can do with however they please.

They can’t invest that money, or loan it out like a bank would.

Now, let’s go back to the balance sheet, and you’ll see under liabilities that Schwab has bank deposits of $366 billion.

Charles Schwab Balance Sheet

This is because Charles Schwab also has a banking arm outside of its brokerage arm. So you can have a checking account and savings account at Charles Schwab. Of which will have FDIC insurance protection.

Now if you deposit money with Charles Schwab the brokerage, you don’t get FDIC insurance. Instead, you get what’s called SIPC, or SIPC insurance, and I’ll talk a little more about that in a second.

But the SIPC insurance isn’t where the safety really comes from with brokerage accounts…

You see, it really comes from the fact that they separate the assets. They can’t put those assets on their balance sheet.

Now let’s take it one step further…

Let’s say you invest in a Charles Schwab ETF or mutual fund. We will use the popular Schwab Dividend Equity ETF (ticker SCHD) as an example.

Now let’s find out who actually controls the investments or money in this fund.

Of course, you can do this with any fund or ETF.

What we are looking for is a document called Statement of Additional Information. You’ll find this along with its prospectus on its website.

This is where we can find who is the custodian is. Or the safekeeper of assets…

Statement of Additional Information

 

 

As you can see the custodian is State Street.

This is important, because even though this is a Charles Schwab ETF, the assets in the ETF are actually being held at a separate institution. Away from Schwab.

Again, that’s an important detail.

In fact, I can think of only one example off the top of my head (although I’m sure there are many) where the investment advisor and the custodian were one in the same… and that’s Bernie Madoff.

So, yeah, we don’t that. It’s sort of a red flag.

Anyways, let’s say Charles Schwab goes bankrupt, what happens to the money you’ve invested into this Charles Schwab Dividend ETF.

Well, nothing really happens. Creditors can’t reach into these funds and take any money, because they don’t belong to Schwab. They are housed at a custodian and kept separate.

Same is true for your brokerage account that might be invested in individual stocks like Apple or Amazon.

Now to wrap up, let me get back to that insurance I mentioned. SIPC.

Obviously SIPC doesn’t insure against market losses, but it does insure if your brokerage goes under and for some reason the company was stealing funds.

This is the FINRA website and as you can see here it says… “when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets.”

And then here it is from Fidelity, which lays it out nice as well…

And as you can see, in addition to the $500k, and $250k, it has excess insurance protection.

So if something did happen to a Charles Schwab, or Fidelity, or Vanguard, I am not concerned about my assets there for the reasons I explained in this video.

Hopefully that helps answer any questions about the safety around brokerage accounts and if you have any questions, you can shoot me an email at CapitalWealthLetter@Investingdaily.com.

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