In the light of the collapse of Lehman Brothers and recent government bailout of AIG, many clients have questioned on how secure their investments are as well as the financial strength of my firm LPL Financial. Let me take a moment to shed some light on the matter and also discuss SIPC Coverage.
LPL Financial has a network of more than 11,000 investment professionals providing financial services, products and objective advice to investors nationwide. LPL Financial is a member firm of the Securities Investor Protection Corporation (SIPC).
What SIPC Covers
LPL Financial SIPC membership provides account protection up to a maximum of $500,000 per customer, of which $100,000 may be in cash. Additionally, through Lloyd’s of London, LPL Financial accounts have additional securities protection to cover the net equity of customer accounts up to an overall aggregate firm limit of $750,000,000, subject to conditions and limitations. Please contact the Legal Department at LPL Financial for further information.
The account protection applies when a SIPC member firm fails financially and is unable to meet its obligations to securities clients.
More from GFC, Below
What SIPC Doesn’t Cover
- SIPC limits coverage to SEC-registered securities. So foreign currency, precious metals and commodity futures contracts aren't protected.
- Bad timing SIPC will replace your shares, not dollar values. So if you own 500 shares of General Electric worth $15,000 and your brokerage firm fails, SIPC will replace your 500 shares, but only at the current value.
- Some outstanding margin loans If your broker fails while you have a margin loan outstanding, SIPC will try to transfer the debt and collateral to another broker. But if no other firm takes on the loan, you'll be on the hook to pay it off to your broker or ultimately to its creditors
SIPC vs. FDIC
In a previous post, How Guaranteed Is It? I discuss the ins and outs of FDIC insurance and how that protects you. Federal Deposit Insurance Corporation covers up to $100,000 of your bank deposits per account. Up to $500,000 of your brokerage assets are also protected, but by SIPC.
Unlike FDIC, which is a government agency, SIPC is funded by member firms. And currently SIPC has only $1.5 billion in assets vs. $45 billion for FDIC. Seems like this wouldn't go very far if the holdings of a couple of big brokerages just up and disappeared.
But SIPC’s doesn’t have to be that big. Broker/Dealers function differently from banks. Banks are in the business of investing your deposits – lending out your savings to other customers, who might renege on those loans. Brokerages only have to hold your securities, nothing else.
Even with the Lehman Brother's incident, SIPC already has issued a statement saying that all the assets under the brokearge umbrella will be taken care of. It never hurts to double check to make sure your firm is covered under SIPC. Especially with all the recent occurences taking place.
If you would like more information on SIPC, including an SIPC brochure, it may be obtained by calling SIPC directly at (202)-371-8300 or by visiting www.SIPC.org