The Securities Investor Protection Corporation, or SIPC, is the reason that you can feel confident that you won’t lose your shirt if your investment company goes belly up.
A nonprofit group created by the Securities Investor Protection Act of 1970, the SIPC is a close cousin of the Federal Deposit Insurance Corporation, those folks who guarantee that you won’t lose the money you deposited even in the event of a bank failure. Here’s how it works: The member firms 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.” (Clients who kept their investments with Lehman Brothers, which went belly up in 2008, represent some recent, grateful beneficiaries of the SIPC.) If an SIPC-member brokerage firm goes bankrupt — or is otherwise financially troubled — you’re totally protected up to $500,000 for the value of your securities, though only $250,000 of cash is covered.
But be aware that there are also a few financial instruments the SIPC won’t cover, like commodities and futures. One very important distinction: the SIPC is not bonehead insurance and it does not protect you against lousy investment decisions, so should a company you invested in face failure or bankruptcy, that’s on you, as far as the SIPC is concerned. But as long as your brokerage is a member — Wealthsimple, for example — you needn’t worry about losing your first half million to a brokerage failure. So relax. You don’t even need to enroll to be protected by the SIPC. You’re automatically covered.