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Brokerage Accts - Money Held In Cash - Question

Katie2
  |     |   3 posts since 2023

Two parts:

1. Are brokerage accts, money held in cash, insured? Not in their bank, just sitting in the brokerage acct.

2. Is there a rating on brokerage accts? If so, where might I find it?

So I'm wondering about Charles Schwab brokerage, not their bank, not their stock, just their brokerage account.

Thanks much!

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2


Answers
Ltssharon
  |     |   471 posts since 2020
Katie, oddly enough, last Friday I asked the very same question number 1 to a fixed income specialist at Schwab. I referring to my "settlement" account. I received the answer that my "settlement " account is not FDIC insured. I feel it is a very important question, Katie2. I appreciate all thoughts on it.
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MAKNYC
  |     |   323 posts since 2015
The ‘settlement account’ you refer to is your brokerage account, and as previously mentioned would not be covered by FDIC. But it would be covered by SIPC in the same manner as FDIC. For people who utilize the bank sweep option, this only comes into play for the hours or day that it takes to move the funds into the affiliated banks, at which point FDIC coverage takes over. The main point is that cash balances of $250k or less would be covered at all points in time by one of the two insuring entities.

One thing to keep in mind, especially given Schwab Bank’s current situation is that the $250k limit would include any free cash that Schwab brokerage sent there as well as any CD’s you might have purchased independently (at Schwab or elsewhere). So it is possible you could unintentionally exceed the insured limits if you did that. It’s particularly relevant because Schwab Bank was extremely aggressive today in its CD offerings, including 5.40% 12 month and 5.45% 18 month. They were even distributing them thru Fidelity.
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Ltssharon
  |     |   471 posts since 2020
Maknyc,
Thankyou very much for both points. Wow, the second point you make really gives me pause.
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alan1
  |     |   877 posts since 2015
Ltssharon and Katie2-- Please be cautious re unsourced statements posted by internet randos (including alan1).

Katie2 asked: "Are brokerage accts, money held in cash, insured? Not in their bank, just sitting in the brokerage acct."

One rando wrote: "The ‘settlement account’ you refer to is your brokerage account, and as previously mentioned would not be covered by FDIC. But it would be covered by SIPC in the same manner as FDIC."
(italics added)

That''s one opinion. Here's another opinion (not mine; it's the opinion of the SIPC):

"It is important to recognize that SIPC protection is not the same as protection for your cash at a Federal Deposit Insurance Corporation (FDIC) insured banking institution because SIPC does not protect the value of any security."
(italics added)

see "What SIPC Protects" at https://www.sipc.org/for-investors/what-sipc-protects

My brokerage "cash" goes into a settlement fund (a money market mutual fund) that endeavors to maintain a stable share price of $1.00. But that share price can decline. And, if it does, the amount of "cash" in the brokerage account will decrease. Unlike FDIC insurance which protects the value of my accounts, SIPC insurance doesn't, at least in the opinion of the Securities Investor Protection Corporation.

I see no reason for me to express an opinion on this matter. As between the opinions of MAKNYC and SIPC, readers are free to make up their minds and choose whichever italics they prefer (or neither).
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MAKNYC
  |     |   323 posts since 2015
Alan1. You are categorically wrong. The SIPC description you reference is correct and compatible with my earlier statements. The poster was asking about cash in an account. They did not ask about money market funds, which are securities, not cash. Schwab no longer offers sweep money market funds, so cash is cash (unless someone proactively buys a money market fund). You obviously don’t have an account there. The question is where that cash custodies, and the poster specifically asked about Schwab brokerage. Hence SIPC cash insurance. I guess you proved your own point about randos.
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alan1
  |     |   877 posts since 2015
MAKNYC -- I think we simply read the OP's question differently. I took the OP's statement that the "cash" was "Not in their bank" to mean that the funds were literally not "in their bank", but had been placed in a Schwab money fund. I may have misunderstood the OP's statement. Sorry for any confusion that I may have caused.
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Kirkland
  |     |   374 posts since 2014
Just to note on TD Ameritrade this am, Schwab is only at 5.35% 1 yr, and 5.40% 18 month, settlement dates 3/17.
TD Ameritrade posts the cash as FDIC insured, not covered by SIPC, on the day after you request the incoming funds. On the day you request the incoming funds it posts it in margin.
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w00d00w
  |     |   360 posts since 2012
I'd recommend this link:
https://www.schwab.com/cash-investments

For uninvested cash in a brokerage or retirement account with Schwab:

Bank Sweep deposits are eligible for FDIC insurance.14

14. Bank Sweep deposits are held at one or more FDIC-insured banks ("Affiliated Banks") that are affiliated with Charles Schwab & Co., Inc. Funds deposited at Affiliated Banks are insured, in aggregate, up to $250,000 per Affiliated Bank, per depositor, for each account ownership category, by the Federal Deposit Insurance Corporation (FDIC). Securities products and services (including unswept or intra-day cash, net credit or debit balances, and money market funds) offered by Charles Schwab & Co., Inc. (member SIPC) are not deposits or obligations of the Affiliated Banks, are subject to investment risk, are not FDIC insured, may lose value, and are not Affiliated Bank-guaranteed. Charles Schwab & Co., Inc. and the Affiliated Banks are separate entities and are all affiliates of The Charles Schwab Corporation.

I'm not sure how to find out which specific "affiliated banks" hold an individual investor's cash. perhaps someone else on this board knows. could also ask Schwab directly
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Infinityy
  |     |   107 posts since 2020
You can see the list of banks by logging into your Schwab account and navigating to the Balances tab.

You can also turn off the Bank Sweep feature, so that your cash balance is kept at the brokerage itself, where it is segregated from the broker's own funds and protected by SIPC (along with supplemental insurance from Lloyd's of London)
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MAKNYC
  |     |   323 posts since 2015
One clarification with regard to Schwab specifically:
The default sweep option applied to customer accounts is the bank sweep option in which case your assets are given primarily to Schwab affiliated banks and would be covered by FDIC insurance subject to customary limits. The other option you have (at least with taxable accounts but I think all individual accounts are eligible) is to exclude yourself from the bank sweep option in which case your cash remains in your brokerage account and Schwab (broker, not bank) pays you interest on those funds. Schwab would refer to this as the Schwab One interest option. Under this option that cash would NOT be covered under FDIC insurance, but would be covered under SIPC (Securities Investor Protection Corporation) in exactly the same manner as you would be covered under FDIC. SIPC is also insuring your securities positions in the event of a Schwab default, but the cash is limited to the cash coverage amount. Schwab has always paid the same rate on both options, currently .45%.
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