Investment Workshop 24: Keeping Your Money Safe

Hello and welcome back to the Millennial Revolution Investment Workshop!

In this article, we’re going to talk about the biggest fear people have when they think about investing: getting scammed.

There’s no shortage of news stories of unscrupulous money managers stealing their clients funds and spending it on lavish vacations and sports cars. Bernie Madoff was one of the most famous modern examples, who ran the biggest Ponzi scheme in history valued at $64.8 BILLION. The collapse of his investment company bankrupted thousands of investors, and even though Bernie Madoff was sentenced to life in prison, that didn’t make the people who trusted him with their life savings whole. The money was simply gone.

So how do we avoid scammers like Bernie Madoff? The answer is surprisingly simple, and available to everyone: Investor Insurance.

Investor Insurance was created after the near collapse of the stock market in the 1970’s, and here’s how it works. Let’s say you hold your money in an insured bank or brokerage, and that bank’s CEO gets a little too into the cocaine and hookers and tries to abscond with everyone’s funds in a suitcase full of cash. The bank would go bankrupt, but your investments would get reimbursed by the Investor Insurance fund, so you don’t end up losing any money. The best part is that unlike most insurance policies where you have to pay a premium, the bank or brokerage is the one that pays it for you. So to be protected, all you have to do is make sure you put your money in an insured financial institution.

What’s Covered

It’s important to note that investor insurance protects your investments against the insolvency of the brokerage firm, meaning that if the company that holds your investments goes under, you get your investments back. However, if your investment itself goes to $0 because the company behind the stock you purchased goes belly-up, that’s not covered.

So if you deposit your money into a brokerage firm like Fidelity, and Fidelity goes under, you get your money back. But if you use that money and invest in company XYZ, and XYZ goes under, you lose your investment. That’s an inherent risk of investing in individual companies directly, which is why we don’t recommend it in our Workshop.

Also, it’s important to note that these insurance cover regulated securities like stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs). Cryptocurrency such as Bitcoin is not a regulated security, so anything involving crypto is not covered.

Trust But Verify

Before you open up an account at any bank or brokerage, you’re going to want to double check that they’re actually a member of the relevant investor protection fund.

Securities Investor Protection Corporation (USA)

Let’s start with the USA. Investor protection for Americans is provided by a company called the Securities Investor Protection Corporation, or SIPC.

It was created by the US government by law, but it’s not a US agency, nor is it funded by taxpayers. Instead, it’s a non-profit corporation that’s funded by contributions from the brokerage companies they protect.

Brokerage firms that are members pay into a shared pot of money that SIPC controls, and if one of the firms goes belly-up, SIPC reimburses their clients for any money that was lost, up to a limit of $500,000.

But how do you make sure they’re a member? Well, the first thing you should do is go to the company’s website and look for a reference to SIPC. It’s usually in the fine print at the bottom of the site. For an example, here’s the information you can find by scrolling to the bottom of Fidelity’s homepage.

However, with something as important as this, you never want to just trust the company claiming that they’re insured. After all, they could be lying! To double-check, you need to go to SIPC’s website and make sure the company is listed in their members directory. To do that, head over to SIPC.org. At the top-right, click “List of Members,” and see if you can find the company there.

In this case, if we start searching for the name “Fidelity,” we can see that they do, in fact, show up in the list.

So now we know that this company is on the up-and-up. If they go under, your money is protected.

Consumer Investor Protection Fund (Canada)

In Canada, a very similar mechanism exists called the Consumer Investor Protection Fund, or CIPF. It works in the same way. Member firms contribute into a shared fund, and if one of them goes under due to fraud or whatever, all their customers get reimbursed up to coverage limits (typically $1,000,000 per account, details here). So you definitely want to make sure your brokerage company is protected.

As an example, let’s bring up CIBC’s website. Note that their main page is designed around their banking business, so you won’t find a reference to CIPF here. Instead, you have to click around to the investment side, called Investors’ Edge.

There, at the bottom of the page, you can find the CIPF logo.

And by going to the CIPF website, and clicking “Member Directory” at the top, we can search CIBC and find them listed as an active member.

Deposit Insurance

A similar system exists for deposits in savings and checking accounts. In the USA, the insurance is provided by the Federal Deposit Insurance Corporation, or FDIC, which protects your money in the event of a bank failure.

To check whether your bank is covered, use FDIC’s BankFind tool by clicking here.

Now remember, this is a government website, so it’s…not the most intuitive thing in the world. I did a quick search for “Bank of America” and it returned results for “First National Bank of America”, “BMW Bank of North America” (whatever that is), and finally, “Bank of America California, National Association”, which is the one we want. Check the primary website listed by the certificate to make sure it’s the one you’re thinking.

If your bank is on there, you’re automatically protected. Checking accounts, savings accounts, and money market/certificate of deposit accounts are all covered up to $250,000, but note that your balance in all these accounts is added together when determining your overall protection. So if you had a checking account and a savings account, your coverage is $250,000 for the combined total, not per account.

Also note that joint accounts are a separate category and qualify for their own coverage of $250,000 per account holder. So if you and your spouse had both a joint checking account and your own individual accounts, you would qualify for protection of $250,000 each for your individual accounts, plus another $250,000 for your half of the joint account, for a total of $1,000,000 of coverage between the two of you.

The Canadian banking system is protected by the Canadian Deposit Insurance Corporation (CDIC). Checking and savings accounts are covered up to $100,000 (plus another $100,000 for joint accounts), which isn’t as generous as the American limit, but let’s get real here. Nobody should be sitting on more than $100k of uninvested cash anyway, so this is more than enough for most people.

The CDIC member directory can be found here, but if you’re like most Canadians and bank with one of the Big 6 (TD, CIBC, BMO, RBC, Scotiabank, National Bank), you’re fine.

Conclusion

OK great! We have now learned how to make sure your investments are safe in the event of a brokerage insolvency. So even if a Bernie Madoff-type situation happens again, you will be covered and get all your money back.

Onto the next section!

Go back to the previous section


WORKSHOP TOOLS

How much does it cost to participate in the Investment Workshop? NOTHING. Because that's how we roll. All we ask is that you sign-up using the following affiliate links to keep it free forever:

For Canadians:

1) Questrade

2) Passiv

For Americans:

1) Vanguard

2) Empower



Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.


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