What Happens to Our Investments if Schwab, Fidelity or Vanguard Collapse?

our money market funds safer than FDIC insured bank accounts and what would happen with your Investments at a broker if that broker collapsed or if you own mutual funds or ETFs what would happen to those Investments if the company behind those funds failed well those are the questions we're going to tackle in today's video hey everybody my name is Rob Berger this is the Financial Freedom show where we talk about investing in retirement and Financial Freedom if those topics are important to you I encourage you to subscribe to the channel also send out a newsletter every Sunday morning you can sign up for the newsletter with the link below this video so since the whole banking crisis that we've been going through the last week or so I've gotten tons of emails from folks you know are money market funds safer than bank accounts what happens to my my funds ETFs like what would happen to vti a Vanguard a total U.S market fund what would happen to that fund and our money if Vanguard went belly up or what would happen I got a question about schd which is a Schwab dividend fund that I I own by the way I also own vti what would happen to that fund if Schwab failed they're great questions and I want to walk through my view on all of these things kind of put them into some context and I think the starting point is to understand the difference between what a broker does with money that we you know give them right to invest and invest in say a mutual fund or an ETF on the one hand and what a bank does with our money when we deposit money into say a checking or savings account so let's start with Banking and to do that I'm going to actually go to svb since they're in the news this is their most recent 10K this is an annual statement they file all public companies do file with the Securities and Exchange Commission it includes their financial statements and the table of contents is basically the same this is all dictated by federal regulations and item eight uh in every 10K or the financial statement and so they've given us a hyperlink and so very good and we get first we have the report of independent registered public accounting firm in this case it's KPMG they are no doubt already in the midst of an investigation for their audit I have to say as a former enforcement attorney at the pcaob it would not surprise me at all if it turns out KPMG did not do anything wrong in their audit but that's a whole other topic for another video all right what I want to show you is their balance sheet so when we make a deposit at a bank checking account savings account CD money market account uh that money ends up on the bank's balance sheet right and they take that money as we I think we all know and they invest it they do they make loans they make car loans business loans personal loans they may invest uh insecurities and so if we look at their balance sheet if we were to invest a thousand dollars at this bank it would be both an asset and a liability we can see the liabilities right down here non-interest bearing demand deposits so these are deposits that the bank holds that are not paying any interest and then they have interest bearing deposits right here and you can see they had quite a lot these are in millions so it's uh you know almost 200 billion dollars now it may seem odd that it shows up on the the bank's books as a liability but keep in mind it does does that because they owe the depositors this money you've deposit a thousand dollars into a checking account you you know the Bank owes you that money back whenever you want it of course it shows up as an asset as well probably initially right it would show up as cash but they could then take that and they could invest in Securities like they this line here uh they can make a loan right they can make a business loan or car loan or or what what have you but they're taking our money that we've deposited some portion of it and investing it right that's sort of the nature of banking and that's the real risk of holding money at a bank is that if the bank does a poor job of it of effectively investing your money and my money and they lose a lot of money we may not get all our deposits back of course we know that but we have FDIC Insurance that's designed to give us some Safety and Security and stability in the banking industry we know that it's 250 000 limit if you watch my last video you also know there are ways to increase that limit and so if you are under the FDIC limits I think a bank account is still about as safe A place to park money as as we have available to us today but that's how a bank works now when it comes to a broker though it's fundamentally uh different and that's what we need to understand and so to show you that we're going to actually look at Schwab's 10K and I picked Schwab uh because uh they're publicly traded unlike say a Fidelity or Vanguard so I have access to uh their uh uh financial statements we're looking at their balance sheet as of the end of last year and uh we're gonna look at a couple of things but I want to start by looking at their total assets which is right here I can highlight it for you I can make this a little bigger there we go and you can see these are in millions so they're total assets are 551 billion dollars that's their total assets now raises a question how much money do have folks given Schwab to invest for them in Schwab funds for example well according to the Schwab website they are managing look at this 7.38 trillion dollars trillion with a t in client assets you might say well wait a minute I can't be right because they've only got 551 billion and assets on their balance sheet and and this is the fundamental difference when we give money to a broker and we buy shares of apple or we buy shares in this case of a Schwab fund 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 go out and invest that money any way they want to that's not how a broker works that would violate state and federal laws it's kept separate the way I like to think about it it's almost like if you took your money at a bank and instead of putting a thousand dollars in a checking account you put it in a safe deposit box at the bank well the bank can't break into that safe deposit box take your money and go make a loan with it it's separate they've got to keep it separate brokers work the same way if I have money and I've put it into shares of Apple I've bought treasury bills with it at a broker doesn't matter if it's Schwab or Fidelity or Vanguard or somewhere else that's that's where it stays and it's actually separate from the assets that Schwab controls that they can you know do run their business with and and so forth it's kept separate so again Schwab over seven trillion dollars in client assets but doesn't show up on their balance sheet now if we go back to the balance sheet though we'll notice something interesting in the liabilities section look at this Bank deposits that's just like svb's balance sheet and and you can see they've got quite a lot of it it raises the question wait a minute Rob if you're if you're right and they're keeping all these these broker assets separate why in the world are Bank deposits showing up as a liability on their balance sheet the answer is Charles Schwab has a bank it's a subsidiary of Charles Schwab and in fact we can see it's right here there's a website Charles Schwab Bank and in fact we can find it on the FDIC website here it is FDIC certificate number 57450 so if you were to deposit money into the Charles Schwab Bank saying a checking account that's no different than depositing in any other FDIC member bank and that works just like a bank so they can take that money and invest it by buying Securities making loans just like a bank does but you get FDIC insurance coverage if you deposit money with Charles Schwab the broker if you don't get FDIC insurance now you do get some insurance it's called sipc Civic which you may be uh familiar with we'll talk a little bit about that but I actually don't think that's where the safety comes from from a brokerage account it really comes from the fact that they've separated the assets they can't put it on their balance sheet they can't decide to invest it any way they please you decide how you're going to invest the assets you can you deposit in a brokerage account and then the broker has to keep those separate from its own uh Assets Now that raises sort of a related question and that is well what if we don't invest in apple or Microsoft or treasury bill what if we invest in say a Schwab money market fund or like schd is Schwab uh ETF how safe is that like what would happen to schd if Schwab were to go bankrupt or what would happen to vti if Vanguard were to go bankrupt and kind of related why we wouldn't expect either of those large uh well-established firms to commit fraud um is it possible could Schwab just decide one day to reach into schd and take our money well those are great questions and I think we're pretty secure I suppose anything is possible in this world but I think we've got a system in place that does a good job of protecting us from those sorts of things and I want to show you how that works so um we'll start with Schwab government money market uh money fund money market fund and I want to walk through this so that you can do this with any fund you own what we want to see is if we put money in this case case in this fund symbol snvxx who actually controls the Investments and the cash that's in this fund this Schwab Corporation have access to this could the CEO of Schwab decide to dip into this fund and take our money if they needed to pay some bills well to figure that out we want to look at their regulatory documents that they file and here we're gonna we're gonna see it here and specifically we want a document that's called a statement of additional information this is a document that they are required to file with the SEC and along with the prospectus and so here it is statement of additional information and a a statement of additional information can cover as it does here multiple funds but one of the things that it will tell you is who's the custodian when we if we're going to deposit money into this particular fund or it could be vti or schd who's the one responsible for actually holding and safeguarding our assets so I'm just going to search for custodian and this probably comes up multiple times in this document but let's see if we can quickly get to it there we go there we are it's custodian and fund accountant State Street Bank and Trust Company serves as custodian and fund accountant for the funds and I looked up some let's see if I can find it quickly here yeah here it is this is from Vanguard I thought I'd show you this one as well and I highlighted the relevant section but let me make it a little bigger oops here we go the Securities that underlie the funds are held by a custodian not by Vanguard Vanguard is paid by the funds to provide Administration and other services the point is ETFs and mutual funds and you can check for all the ones you own if you want statement of additional information is where you'll find it they hire and pay a custodian to keep these assets separate from in this case Schwab or Vanguard and that's very important in fact while I'm sure there are many examples I can only think of of one off the top of my head where the investment advisor and the custodian were actually one in the same Bernie Madoff yeah we don't want that that is a red flag so for example where this may come up is if you hire an investment advisor to manage your assets for you they should never ever ever have control of those assets they should be somewhere else like at a Vanguard or at a Fidelity now they may have the ability to buy and sell in your account because you've hired them to manage your Investments but they should never have complete control of those assets ever and if an investment advisor ever suggests that he or she should be able to control your money uh yeah that's a big big red flag but in the case of like schd or a money market fund vti at Vanguard check out the statement of additional information you will see uh that they have custodians that keep this money separate and apart from Schwab or Vanguard or Fidelity and that kind of gets to sort of the last question is let's imagine Schwab went Belly Up bankrupt uh well they can't creditors couldn't reach in and say you know what you owe us money Schwab so uh we want you to go into schd or one of your money market funds to pay us back well Schwab would simply say sorry we don't own those those are not our that's not our money to control that belongs to our clients we don't have control over that so you're you're out you're out of luck now one thing I do want to mention I talked about the insurance sipc um the thing to keep in mind is that that does not ensure against Market losses so if Schwab were actually to fail schd itself would still continue to exist now it might get administered differently but the custodian still has all the assets they haven't gone anywhere Schwab's creditors can't get access to them so I have no concerns personally that even if something like that were to happen I think my investments in schd they would still be there but that doesn't mean their market value wouldn't go down of course you can imagine if a firm like Vanguard or Fidelity or Schwab actually failed there would be a lot of bad things going on in the economy and maybe even the banking system for that to happen and so the value of maybe all of our investments would go down significantly there's no protection against that as investors that's just a risk we take now uh Civic could protect us uh if say a broker would actually go in and steal our money but of course there are limits on the amount of that coverage but I think for most people that's not actually what they're focused on because of the recent banking turmoil they're really focused on a broker collapsing and for me that's just not a concern in terms of you know the safe keeping of my assets for all the sort of the reasons that I describe now I will leave links to everything I've I've shown you below the video but I want to show you a couple of more sort of additional reading that I think you might find very helpful and the first uh is from uh finra and they talk about if a brokerage firm closes and you can see here for example in virtually all cases when a brokerage firm ceases to operate customer assets are safe and are typically transferred in an early fashion to another registered brokered firm but there's more information here I'll leave that for you Fidelity has a page where they talk about the difference for example between FDIC Insurance Civic which I I just briefly discussed and other types of coverage one thing I should go back on on this coverage by the way it's Securities investor Protection Corporation uh some of the bigger firms and this is certainly true with fidelities you see here they have excess coverage because Zipit covers up to 500 000 in Securities 250 000 limit for cash but uh you know firms like Fidelity are going to have additional coverage um that they effectively pay for for insurance so you can check that out but I think that's a very helpful page as well so I know I've kind of gone through this quickly I'll put all this information below the video my take on it is even in the sort of current banking crisis I think Banks as long as you're under the FDIC limits incredibly secure I personally think money market funds are are incredibly secure that's not to say that none of these things have any risk but I think uh the risk is is is is is minimal certainly if a Vanguard or Fidelity or Schwab were to go under uh I don't have I don't personally have any concerns about the safeguarding of my Assets in the brokerage accounts including uh ETFs and funds that that the the broker's name is behind like an schd that fund is still going to exist it may get changed and no longer called a Schwab fund under those sets of circumstances but I personally don't have any concerns that those assets would go anywhere certainly Schwab's creditors would have no claim to those assets at all uh in my view so there you go if you have any questions leave them in the comments below I'll do my best to help you out any way I can and until next time remember the best thing money can buy is Financial Freedom

Channel: Rob Berger

Views: 1,147,878

Keywords: broker bankruptcy, brokerages safe, money market fund vs bank account

Id: wz64z1YuL0A

Length: 16min 51sec (1011 seconds)

Published: Fri Mar 17 2023

Reddit Comments

[u/tradegator]

Good video and very timely. I was inquiring with Schwab this past week on exactly this subject. All I've gotten from them is a bunch of documents - uggh... haven't gone through them yet.

I have two questions after watching the video.

1. What about a margin account? I don't buy "on margin", but my account is a margin account so as to get immediate access to proceeds so I can buy into into a different position without waiting until the funds are available from the sale. Does anyone know if securities bought on margin are treated differently from those bought in a cash account? Could they be subject to creditors in a bankruptcy?
2. What happens if an ETF or mutual fund is bought through Schwab, for example, and the custodian is other than Schwab, and the custodian goes bankrupt. Are those assets on the custodian's balance sheet and subject to creditors?

If anyone knows the answers to these questions, please enlighten us.

Thanks

[u/bailey-boxer]

Thank you for posting this

[u/unknownusername77]

Direct register your shares with the company’s transfer agent if they have one and you want the shares in your name and full legal ownership

[u/marvinapplegate1964]

I used to work for Fidelity from 2015 to 2016, so it has been awhile. But in addition to SIPC, they also had additional coverage beyond SIPC levels that were insured through Lloyds of London. They did not proactively market that though.

[u/FitImportance1]

Hopefully nothing since I have TDA! Ha ha ha!

[u/CookieEnabled]

Then I work until I am dead.

[u/Sweetinnj]

Thank you for posting. Very informative.

[u/TheRealNiblicks]

Well, it was pretty good. I like the Madoff burn. A good, calm explanation about the differences between a broker and a bank. I like the walk through the 10-K's to explain.

My excess SIPC limit is $50 million. That got me thinking about how some of us will bump up against that limit. Ok, maybe just Sumit. Time to open a second account, just in case. ;-)

[u/Erroneous-Monk421]

Worth watching; I feel better about my investments.