The Advantages Of Excess SIPC Insurance Brokerage Accounts
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The Advantages Of Excess SIPC Insurance Brokerage Accounts

Robert Amoruso is the Founder and CEO of Gideon Strategic Partnersa boutique investment advisory firm based in Santa Monica.

Investing in excess of SIPC-insured brokerage accounts instead of FDIC-insured bank accounts may seem daunting. Still, for savvy investors, it could be the key to unlocking higher returns with greater security. Knowing how banks and investment custodians make money is essential to understand why. Banks primarily make money by lending out deposits at higher interest rates than they pay depositors. This is why FDIC-insured bank accounts are limited to $250,000 per depositor per account ownership category.

In contrast, investment custodians like Fidelity, Schwab and TD Ameritrade primarily make money by charging fees on assets under management. These custodians hold client assets in separate accounts legally segregated from their assets, so even if the custodian goes bankrupt, they are still protected.

This is where excess SIPC insurance comes in. The Securities Investor Protection Corporation (SIPC), a nonprofit dedicated to keeping your investments safe and secure, provides up to $500,000 in protection for securities held in brokerage accounts in the event that the brokerage firm goes bankrupt. Excess SIPC insurance offers additional protection beyond the $500,000 limit, typically up to $25 million per account. Investors holding securities in extra SIPC insurance brokerage accounts can have greater peace of mind knowing their assets are protected in a catastrophic event.

But what types of securities are appropriate for cash management? Short-duration, triple tax-free municipal bonds with low duration can be an excellent option for investors looking for a low-risk, tax-efficient investment. State and local governments issue municipal bonds to fund public works projects, and the interest income is typically exempt from federal, state and local taxes.

Short-duration bonds have maturities of one to three years, which means they have a lower interest rate risk than longer-term bonds. And because municipalities issue them, they are typically considered safer than corporate bonds. So why is investing in large institutional investment custodians rather than banks safer? For one, the legal segregation of client assets means that client assets are protected even if the custodian goes bankrupt.

Additionally, investment custodians are subject to stricter regulatory oversight than banks. For example, the SEC requires investment custodians to undergo annual audits to ensure compliance with regulations, and custodians must maintain a minimum amount of net capital. In contrast, FDIC-insured banks must only maintain a reserve ratio of 10% of their deposits.

Of course, there are always risks involved with investing. It’s crucial to perform thorough research and collaborate with a financial advisor who can help you craft a tailored financial strategy that aligns with your goals and priorities before making any decisions. But for investors looking for a safe and potentially lucrative way to manage their cash, excess SIPC insurance brokerage accounts with short-duration triple tax-free municipal bonds may be worth considering.

In conclusion, investing in excess SIPC insurance brokerage accounts may seem intimidating, but it can offer advantages over FDIC-insured bank accounts, such as higher returns and greater security. By understanding the differences between how banks and investment custodians make money and by considering low-risk investments like short-duration triple tax-free municipal bonds, investors can consider taking advantage of these benefits while minimizing their risk.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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