By Seth Van Brocklin, Senior Financial Editor, Independent Living
How safe are your financial accounts? It’s a question that you need to consider very carefully right now. Especially if you have funds on deposit at banks or brokerages.
Your bank accounts are covered by FDIC insurance. That’s now up to $250,000 per account. However, the FDIC itself is grossly undercapitalized. (But that’s a topic for another time.) My point now is that, even assuming FDIC coverage protects your deposits from bank failures, it won’t protect you from most other threats to your account balances.
Find This Out Now: What FDIC Insurance Won’t Cover
FDIC insurance provides no coverage for brokerage accounts, insurance policies, and other non-bank financial accounts. If you have bank balances above $250,000, FDIC insurance leaves your “excess” deposits vulnerable to bank failures. Or to appropriation in the event of government-orchestrated “bail-ins” of the banking system.
FDIC insurance provides no protection against identity theft. You might be able to recover funds taken fraudulently from your accounts. But you’ll bear the burden of any costs associated with restoring your accounts and your credit history. That is unless you have identity theft insurance.
FDIC insurance provides no protection from judgment creditors or the IRS. The government can levy your accounts if it says that you owe unpaid taxes. Finally, FDIC insurance won’t protect your accounts from being seized by state governments under “dormant funds” laws.
Dormant Accounts Can End Up in Bureaucratic Purgatory
You’ve probably heard of “inactivity fees.” Maybe you’ve found them on a brokerage account statement. Some firms apply them to customers who buy or sell securities infrequently.
Well, banks also have procedures for dealing with inactive accounts. If you hold a bank account and no transactions post to it for a period of a year, then your bank may flag it as “dormant.” It will then try to contact you to make sure you’re still in control of the account.
After some period – which may be from one to five years but varies from bank to bank and state to state – your dormant account will be turned over to the state government.
The Government’s Stealth Money Theft Program – Beware!
Here’s how the Georgia Department of Revenue explains it:
“When a bank or company holds property belonging to someone else, but has lost contact with that person for a certain period of time, the bank or company must send the property to the state. The state serves as custodian to the property and makes several attempts to reunite the owners with their property.”
But if the owner doesn’t claim the account, “dormant funds are remitted to the State of Georgia Department of Revenue.”
Similar provisions are enshrined into law in some form in the other 49 states. After some period of time, which is not always spelled out explicitly, dormant funds held in state custody will be remitted to the state.
Revenue-hungry state governments have an incentive to sit on “dormant funds” rather than actively seek out their rightful owners. Revenue agencies may do little more than post information about dormant accounts in publicly accessible databases. It’s up to you to search them.
You, a parent, or other relative may have accounts, insurance benefits, or other “unclaimed properties” owed to you. Assets that are properly yours/theirs may be sitting in some government office waiting to be claimed.
To avoid having this happen in the first place, monitor all of your accounts and assets carefully. Make sure transactions post to all of your accounts at least once a year. And make a list of all your assets to give to a loved one. You should request such a list from parents and other close members of your family as well. In the event of a death, any assets that aren’t listed may not be found by survivors.
Eminent Economist Sounds Alarm on Brokerage Account Risks
Any securities you hold in a brokerage account are supposed to be protected from the risk of the brokerage firm failing. Supposedly you are covered by the Securities Investor Protection Corporation (SIPC). Officially, SIPC insures accounts up to $500,000.
But that insurance isn’t all it appears to be. An SIPC-covered account could even make you more vulnerable to losses. Especially if you are a victim of a Ponzi scheme or other fraud perpetrated by a broker. That’s because SIPC can refuse to honor its insurance promise in the event of fraud.
The SIPC-appointed trustee can even sue you – if you are an “insured” victim of the firm’s fraud, to recover withdrawals you made in your account! (That’s known as “claw-back”.)
The SIPC has fought to make sure that you are entitled only to your original deposits. If your broker pulls a Bernie Madoff, capital gains and dividends that you thought you had earned (and withdrew, paid taxes on, and spent) can be retroactively taken away!
Boston University Economist Laurence Kotlikoff recently declared:
“SIPC insurance is a scam – indeed a bigger scam than Madoff.”
His advice: “I very strongly advise everyone with a brokerage account to immediately close their accounts and move their money to mutual fund companies operating with one of the major, trust- worthy custodial companies that is not, itself, in the brokerage business.”
That’s a drastic step to take. Is it necessary?
Diversification Has Never Been More Important
First of all, holding funds directly with a reputable mutual fund company such as Fidelity or Vanguard (and avoiding their brokerage accounts) is perfectly sensible. It’s a good way to invest a portion of your retirement assets. You can also own shares in some blue-chip stocks directly via Dividend Reinvestment Programs. But there is a catch. With most stocks and exchange-traded instruments, it is nearly impossible to buy them outside of a brokerage account.
We’ve always advocated diversifying a good portion of your wealth outside the banking and brokerage system.
I wouldn’t necessarily advise pulling out of your brokerage accounts entirely. It could trigger tax liabilities. But if you’re like most investors, you’re probably overly reliant on one or two brokerage accounts for the bulk of your investments.
No matter how you divvy up your assets, you can never escape risk entirely. But you do need to be aware of risk. Then spread it out so that a disaster in any one particular account doesn’t put you in the poor house.
Diversify, diversify, diversify – including into tangible, non-financial assets such as physical precious metals.