Nelson Capital has been a customer of Charles Schwab for more than 30 years and Schwab is the firm’s single largest custodian, holding over $500 million of our clients’ assets. Schwab began offering custody services to Registered Investment Advisors in the early 1990s as it established itself as one of the largest discount brokers in the industry. Over time, Schwab’s business has evolved to include the formation of Schwab Bank, which has grown to be a significant part of the parent company.

The rapid failure of Silicon Valley Bank is a reminder of the importance of safeguarding one’s assets. To ensure our clients’ assets are protected, we continuously monitor the health of Schwab’s balance sheet. Is there a possibility that Schwab could fail? What would happen if Schwab shut down?

We believe the risk of Schwab failing is extremely low. Schwab’s balance sheet, access to liquidity and depositor base are much stronger than those of the banks that recently became insolvent.

However, we also want to help clients understand how their assets are protected. In the unlikely event of failure, the U.S. government would help facilitate an orderly sale to another brokerage firm, and customer accounts would simply transfer to the acquiring company. But what would happen if there is no buyer and Schwab must be liquidated? Although history does not offer many examples of brokerage firms like Schwab shutting down, it does happen. Bear Stearns and Lehman Brothers collapsed in 2008 due to mismanagement and overexposure to the subprime mortgage market. As a result of these failures, brokerage firms are now legally required to segregate customer securities from broker-dealer assets, so that customer assets are protected. Per Schwab, “in the very unlikely event that Schwab should become insolvent, these segregated securities are not available to general creditors and are protected against creditors’ claims.” If Schwab were forced to be liquidated, customers assets would be safely transferred to a new custodian under the supervision of a court-appointed trustee.

In the unlikely scenario that customer assets are lost or cannot be located, there is a multitier system in place to protect investors.

SIPC Insurance

The Securities Investor Act of 1970 requires that all broker-dealers registered with the SEC be members of the Securities Investor Protection Corporation (SIPC), which provides up to $500,000 in securities insurance to brokerage firm customers. For customers with multiple accounts, SIPC protection is determined by “separate capacity.” An individual account, joint account and an IRA would be considered three separate capacities and would be eligible for a combined $1.5 million in coverage if assets were lost or unaccounted for. The insurance covers customer’s stocks, bonds, CDs, mutual funds, and other registered securities. However, it does not cover currency, commodities or related futures or contracts.

FDIC Insurance

Most Schwab brokerage accounts have a Bank Sweep Feature that automatically sweeps cash balances to Schwab Bank and for that reason the cash is insured by the Federal Deposit Insurance Corporation (FDIC). The basic FDIC insurance amount is $250,000 per depositor, or $500,000 for a joint account and covers cash and accrued interest. FDIC does not insure money invested in money market funds, stocks or bonds.

Lloyd’s of London Insurance

Schwab offers additional protection which covers up to $150 million per customer, including $1,150,000 of cash. This additional protection becomes available in the event that SPIC limits are exceeded and there are no additional funds available from the failed brokerage firm.

Bottom Line

We believe Charles Schwab Corporation is financially sound, and that your money at Schwab is safe with multiple layers of protection in place. However, there are additional steps that can be taken to safeguard your money. We advise clients to keep money in at least two financial institutions. Customers of Silicon Valley Bank did not lose money, but they lost access to their accounts for several days. If Schwab is the custodian of your investment accounts, having a checking account at a second bank and keeping cash amounts under the FDIC insurance limits is prudent.

For cash at banks that exceed FDIC limits, one of the safest alternatives is to invest in U.S. Treasuries, which are backed by the full faith and credit of the federal government.

It is also important to keep copies of account statements, which will make it easier to file an insurance claim with SIPC, if needed. Nelson Capital archives monthly account statements for all managed accounts as part of our services.

If you have any questions or concerns, please do not hesitate to contact your advisor at Nelson Capital.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.