Dear Linda,

I remember being told that I shouldn't keep more than $250,000 at one bank since that is the FDIC insurance limit. What about my money at a brokerage institution, such as Schwab, Vanguard, or Fidelity? Should I spread my money out across brokerage firms as well? How do I best keep my money safe?

xxx

Protecting your money in the bank versus the brokerage firm are two separate things. Let's review the process for both as well as some real-life identity theft cases that we can all learn from.

How to protect your money in the bank

This includes your checking, savings, money market deposit accounts (MMDAs), and certificates of deposits (CDs).

1) Confirm these accounts are being held at an FDIC-insured bank.

The Federal Deposit Insurance Corporation (FDIC) is an independent US Government agency that protects your deposit accounts if the insured bank fails. Your coverage is automatic as long as your bank is insured by the FDIC.

2) Confirm you are within the coverage limits.

Each "category" of account is covered for the principal plus interest up to $250,000, per bank. For example, if you have an Individual account and a Trust account, they will each be covered for up to $250,000. View the list of categories here or use the FDIC's tool, EDIE. EDIE allows you to enter your bank's name, account categories, and balances to identify any gaps you have in coverage.

The most common reasons I see people exceeding the limit without being aware is an inheritance or house sale. They receive that influx of cash and are exposed while figuring out what to do with the money.

Three banks have failed so far this year, including the high-profile Silicon Valley Bank (SVB) collapse. If it happens to your bank, the FDIC typically pays out the insurance within a few days of the bank closing. You will either be reimbursed with a check or your funds will be moved to a new account at another FDIC-insured bank. As the bank gets liquidated, there may be additional available assets that can be distributed pro-rata to those with accounts in excess of the FDIC insurance limits. These payments, though, are not guaranteed and can take several years to be fully distributed.

How to protect your money in a brokerage firm

This includes cash and securities, such as stocks, bonds, Treasury securities, certificates of deposit, mutual funds, and money market mutual funds.

1) Confirm this money is being held at a registered brokerage firm that is regulated by the SEC and under the supervision of FINRA.

Registered brokerage firms are required to keep customer assets segregated from the firm's assets. Therefore, even if the brokerage firm fails, the customer’s assets are safe. Periodic examinations are conducted to ensure the registered firms are financially sound and that their annual filings are accurate. They are also required to maintain a minimum level of reserves and be a member of the Securities Investor Protection Corporation, which offers SIPC insurance.

2) Confirm you are within the coverage limits.

SIPC insurance is invoked if a brokerage firm shuts down and assets are missing due to theft, fraud, or unauthorized trading. Notably, this is not protection against market loss, being sold worthless securities, or bad advice from a broker. Also, SIPC insurance, just like FDIC insurance, does not come into play unless the brokerage firm is already shutting down and in liquidation mode.

SIPC protection is further limited to $500,000, which includes $250,000 in cash, per account "capacity", per firm. Examples of separate account capacities include an individual account, joint account, IRA, and Roth IRA. A comprehensive list of all capacities can be found here.

Because brokerage firms are required to keep customer assets separate, you do not need to spread out your money across multiple brokerage firms as you do with banks. If your brokerage firm fails, your accounts would remain intact and be transferred to another SIPC-insured firm.

Two Real-Life Money Theft Stories Involving Banks

While being aware of the above information is important, equally important is identity theft prevention. There is a much greater likelihood that you will encounter fraud than a bank failure.

Account Takeover Fraud

We had a client with an old savings account at a bank. She decided to close the account and consolidate it with her other assets in an effort to simplify. Upon arriving at the bank, she learned that someone else took over the account and withdrew the money. She was referred to the bank's fraud department, which originally denied her claim. They stated that she did not check her account frequently enough and should have noticed the missing money. While they eventually approved her claim and restored her account, it was not an easy process.

Unauthorized Transfer Fraud

Another client was one of the many victims of the Equifax hack. Equipped with his social security number, thieves opened a brokerage account at a small online firm in his name and initiated an ACH transaction from his checking account. Similarly, the bank first refused to pay the client back, saying he should have caught it faster. Only after threatening to write about his experience and share it with his online following did the bank make him whole.

Prevention will save you time and money

Do everything you can to make yourself a hard target.

1) Freeze the credit for everyone in your household. This prevents anyone from opening an account or buying a home in your name.

2) Ensure 2-step verification is set up for all of your accounts.

3) Check your statements every month. From what I was told from both victims above, catching the transaction within 30 days makes it much easier to get your money back.

4) Follow a security expert. I am not a security expert and the landscape continues to evolve. I get a lot of my information from Brian Krebs and his blog. Check him out or find one you prefer to make sure you are doing everything possible to keep your money safe.

originally published 6/19/2018

"Ask Linda" is a periodic post where the founder of Planning Within Reach, LLC, Linda Rogers, picks one question from her readers and publishes a detailed answer with the hope that it may benefit others. If you would like to ask Linda a question, email linda@planningwithinreach. For advice on your personal situation, schedule an initial call to learn about our services.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.