So, what is it exactly?
Trusting an investment company with your money can sometimes feel like a scary thing to do. It’s understandable, even wise, to feel that way since the financial industry has had a few bad apples in its history, what with your Bernie Madoffs and your Great Depressions. But the financial industry knows about the dangers, too, and that’s why the SIPC exists. The SIPC, which stands for the Securities Investor Protection Corporation, is a nonprofit group created by the Securities Investor Protection Act of 1970. And this is how it works: The members of the SIPC—which include virtually every legitimate investment company in America—fund the SIPC from their corporate coffers. And those funds serve to protect against the loss of cash and securities at what the SIPC describes as a “financially troubled SIPC-member brokerage firm.”
The SIPC, in other words, is basically an insurance policy. If an SIPC-member brokerage firm goes bankrupt—or is otherwise financially troubled—you, as a client of said institution, are protected up to $500,000 for the value of your securities (including $250,000 for cash).
What are the pros?
You don’t have to enroll. There’s no monthly premium or insurance fee. You don’t have to do anything. As long as your brokerage firm is an SIPC member, you’re covered.
Is there anything to be careful about?
You know how some people put security stickers on their windows to scare off burglars instead of owning an actual security system? Well, the SIPC logo is that: just a logo. So to be 100% sure the folks you’re investing your money with are actually insured, check the list of members on the SIPC’s site. Wealthsimple is not a member of SIPC, but our brokerage provider, Apex Clearing Corporation, that holds your investments is a member.
You’d also be wise to understand what types of losses are—and aren’t—covered. The SIPC doesn’t cover commodities or futures, and it doesn’t cover investments at non-SIPC member firms. The SIPC steps in when a firm closes its doors while it still has your money; that could mean bankruptcy or the result of other acts of mischief that cause a company to become what the SIPC describes as, again, as a “financially troubled” firm. (You can read more about coverage in this handy brochure.)
If the loss is more than $500,000, well, that will be a loss you’ll have to eat, since it’s greater than the SIPC’s insured amount.
And remember: This isn’t going to insure against market losses, bad financial advice, hidden fees, or trying to be a day trader (did we mention we don’t recommend that?).