Tuesday, November 13, 2007

Are your Brokerage Assets safe at E*Trade?

As outlined yesterday, there is an increasing probability that E-Trade Finanical will need file for bankruptcy. Customer assets at E-Trade are generally divided into two classes; the first being brokerage assets. These would be the stocks, bonds, mutual funds, and other items found in your brokerage account. Brokerage account assets are insured by SIPC up to a value of $500,000; this does not protect against market losses but guards your account in case the broker goes out of business. Usually the assets in your account will simply be transfered to another brokerage firm if the current one goes under. SIPC insurance has been demonstrated to work well in the past in situations where brokerage firms have declared bankruptcy. The following article provides an overview:

Investor assets said safe in E-Trade accounts

So what should you be concerned about at E-Trade?

Brokerage money market accounts offered directly by E-Trade and not backed by FDIC insurance are at risk. Many of these money market accounts are not likely to be covered by the SIPC if E-Trade goes under (despite the SIPC coverage for up $100K in cash and $500K in securities).

E-Trade also has a division which operates as a standard bank (E-Trade Bank). This is different then your brokerage account. If you perform your banking at E-Trade then these accounts are covered up to the $100,000 FDIC limit. However any money kept in your bank deposit accounts above this limit will be lost. This is why is is critical that you transfer cash above the FDIC limit out of your E-Trade bank account now.

Unless you have brokerage assets above $500K then the stocks, bonds, mutual funds, and other instruments in your brokerage account are also safe. There is no need to panic or take action with your assets at E-Trade if they are below the SIPC (brokerage) or FDIC (bank) insurance limits. Everyone should note that most of the analysts are giving E-Trade a 1 in 6 chance of going under, so it is important to transfer assets above these limits if you are not comfortable with the current sizeable risk of losing your money.