Is My Money Safe After a Bank Collapse? What Financial Advisors Say

Analysis March 16, 2023 at 03:09 PM Share & Print

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The Silicon Valley Bank and Signature Bank collapses rattled financial markets, leaving investors wondering what other shoes might drop and how that could affect their portfolios.

Bank customers also may question how safe their money is, even though the government announced that all depositors at the two failed banks would be made whole.

We asked financial advisors this week: What are you telling clients about the safety of their assets in banks and other institutions?

Here are responses from seven advisors. Some have been edited.

(Photo: Adobe Stock)

1. What to Know About SIPC, FDIC Insurance

Leyder “Aiden” Murillo, managing director, Wolfpack Wealth Management:

With the rise of fear and bank turmoil, we’ve been informing our clients about the protection offered by SIPC and FDIC.

SIPC (Securities Investor Protection Corp.) provides insurance protection to broker-dealer (custodian) customers if their custodian fails and cannot return the customer's securities or cash. This insurance coverage is limited to a maximum of $500,000 per customer, including up to $250,000 for cash.

On the other hand, FDIC (Federal Deposit Insurance Corp.) provides insurance protection to depositors if a bank fails. This insurance covers depositors' accounts, including checking and savings accounts, up to a maximum limit of $250,000 per depositor per insured bank.

We’ve emphasized that while these government-backed organizations provide a valuable safety net, they do not guarantee against loss, and it's essential to carefully consider the risk profile of different financial products and institutions before investing.

2. Avoid Keeping Too Much Money in One Place

Eric Roberge, founder and CEO, Beyond Your Hammock:

We urge clients to know and respect the limits that the FDIC will cover when it comes to bank balances. We will assign an action item to move cash to a new location if there is an account with a balance over $250,000 per depositor, or $500,000 per account for joint accounts. Last week, we also did a sweep of client portals in eMoney to identify any balances over FDIC limits. We contacted clients who showed cash accounts over the FDIC limit with reminders to move extra cash to ensure that money is protected.

We're also reminding clients that SVB had a very high level of loans plus securities as deposits, and a very low amount of retail deposits as a percentage of total deposits. The issues that caused Silicon Valley Bank to collapse do not appear systemic. For those spooked by stock market movements, we explain there's a difference between short-term market volatility and the actual health of the bank. The two can be correlated, but that doesn’t mean they are always related.

3. The SEC Requires Protection for Securities Investors

Zack Swad, president and wealth manager, Swad Wealth Management:

For brokerage accounts, many people are unaware of the SEC’s Customer Protection Rule. This rule legally requires broker-dealers to safeguard investments by segregating clients’ fully paid-for securities, e.g. stocks and bonds, from the broker-dealer.

This means that in the unlikely event of insolvency, those segregated assets aren’t available to general creditors and are protected against creditors’ claims.

If a brokerage firm fails financially and assets are missing, there is coverage through SIPC, and some brokerage firms buy additional insurance through companies like Lloyd's of London.

For the vast majority of people, these coverages are more than enough to feel secure.

4. Consider Short-Term Treasurys

Ryan Greiser, founder, financial planner, Opulus:

I can tell you one thing for sure — your hard-earned assets need to be safe, and you need to be proactive about it.

Let's start with FDIC insurance — it's an absolute lifesaver in case of bank failure. You need to make sure that your deposits are within the FDIC insurance limits of $250,000 per depositor per insured bank. Don't mess around with that!

But here's the thing, you should consider not putting all your eggs in one basket if you're sitting on a boatload of cash. Diversify the banks you use, spread your risk across multiple institutions, and reduce your exposure to any single bank's potential failure. You have to be smart about it.

And lastly, let's talk about managing your risk. I'm not saying you shouldn't take risks, but you need to be strategic about it. Consider investing in short-term Treasurys for funds you don't need immediate access. These are backed by the full faith and credit of the U.S. government and are a low-risk option for those looking to minimize risk.

So, there you have it, understand FDIC insurance, diversify your banks and manage your risk. It's as simple as that! Don't wait for another crisis to happen, be proactive about protecting your assets.

5. Use Established Banks

Spencer Stephens, founder, Rooted Interest:

The most important thing is paying attention to FDIC and SIPC insurance levels. If a bank or investment institution were to fail, you are guaranteed to recoup cash and securities lost up to those levels.

Holding your funds at well-known, long-established banks and institutions is important. These institutions have survived many different economic cycles and are under high scrutiny to ensure they are protecting customers by protecting themselves.

6. Give Clients Information

Kevin M. Arquette, wealth manager, managing partner, Wealthpoint Financial Planning:

Given the recent high-profile bank failures, it is natural for clients to be concerned about their finances. It is essential to provide clarity on how these events impact their finances. In addition to issuing commentary on these bank failures, educating clients on FDIC insurance is crucial. To this end, I suggest referring clients to FDIC.gov, which offers comprehensive explanations of the coverage provided. By understanding how the coverage works, clients can feel more in control of the situation.

7. Know the FDIC Nuances

Dawn Mabery Chestnut, investment advisor, Mabery Consulting:

Most know the maximum level of FDIC protection is $250,000. However, many are unfamiliar with its nuances and therefore don't fully understand the protection. Coverage is based on account category and is per bank. Categories include individual, joint, trust, retirement/IRA, etc.

If you own an individual savings, checking and CD at the same bank, those accounts combined get no more than $250,000 protection. You do not get separate $250,000 for each of the three accounts. If you also have a joint account at that same bank, your share of the joint account gets up to $250k protection.

All deposits owned by a corporation, partnership or unincorporated association at the same bank are added together and insured up to $250,000, separately from the personal accounts of the owners.