Investor Brain

Monday, December 10, 2007

Words of Wisdom from Mickie Siebert

While researching my 12/17/07 column, which will focus on how brokers protect your assets, I was sent the November issue of Mickie Siebert’s “Dollars and Sense” newsletter, which was mailed to all Siebert’s customers with their November statements.  She has a lot of experience dealing with the safety of the public’s money.  I cannot reproduce the entire newsletter, nor do I have room to quote her extensively in the upcoming column, but I thought the following was of great interest and is well worth reading. 

Account Protection

You can take comfort in knowing that, when you do business with Siebert, your account receives the highest level of coverage available in the brokerage industry - to the total net equity - with no limit for the amount of cash or securities.  And, unlike many other brokers, there is no “cap” on the aggregate amount of coverage for all of our customers’ assets.  Let me explain how this works.

There are different kinds of account protection that brokerage firms provide their clients to protect your account against insolvency of the brokerage or its clearing firm.  (There is no account coverage that will protect you against fluctuations in the market value of securities.)

All securities brokerage accounts, including your Siebert account, receive coverage from the Securities Investment Protection Corp. (SIPC) as primary protection for up to $500,000, including a limitation of $100,000 for cash.  SIPC coverage is required of all registered broker-dealers.  Since most “cash equivalent” money market mutual funds are considered securities under SIPC, investments in money market mutual funds held in a brokerage account are protected by SIPC along with your other securities to a maximum of $500,000.  You may visit http://www.sipc.org to learn more about SIPC protection.

Brokerage firms also have the option of providing “excess-SIPC” account protection for assets above these SIPC limitations through policies secured from private underwriters. 

Muriel Siebert clears on a fully disclosed basis through - and domiciles your accounts at - National Financial Services LLC (NFS), a Fidelity Investments company. We are the “introducing broker” and NFS is the clearing firm, which means that they clear youre trades and execute certain other activities.  You see their name along with ours on your monthly statements and confirmations.

NFS has arranged for additional protection for cash and covered securities to supplement its SIPC coverage.  This additional protection is provided under a surety bond issued by the Customer Asset Protection Company (CAPCO), a licensed Vermont insurer with an A+ financial strength rating from Standard and Poor’s.  NFS’ excess-SIPC protection covers total account net equity for all cash and securities in excess of the amounts covered by SIPC, for accounts of broker-dealers, like Siebert and Fidelity Brokerage Services LLC, which clear through NFS.  You may access a CAPCO brochure about “Total Net Equity Protection” at http://www.siebertnet.com/html/convenience___security.html.

NFS has stated to us that “there is no specific dollar limit to the protection that the CAPCO bond provides for any single customer account, nor is there an aggregate dollar limit applied to the total combined customer accounts of any one correspondent broker that clears through NFS.”

Many other brokerage firms do not provide the level of total net equity account protection you receive.  Many have excess-SIPC policies that are subject to aggregate limits on the total amount of customer assets that are covered, limits that are a fraction of total customer assets in their custody. 

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Before you open a brokerage account, or deposit additional assets that would take you over the basic SIPC coverage levels, be sure you are familiar—and comfortable—with the assurances that your broker is protecting your money. 

Friday, December 07, 2007

Hot Topic for Investors

In my most recent Barron’s column, which will appear here tomorrow, I concluded with the following query:

“OUR 13TH ANNUAL REVIEW of online brokers is coming up. What’s most important to you these days as you consider opening—or moving additional money to—an online brokerage account? Let us know at electronicinvestor@yahoo.com.”

So far, the overwhelming majority—about 3/4 of the 100 or so responses to date—has been, “How safe is my money?” Today I queried most of my broker contacts as follows:

Given the interesting events at E*Trade recently, I’m asking my broker contacts to comment on the following.  I’m turning in another column very soon (by noon Monday) so I’d appreciate a quick turnaround—and apologize in advance for rushing you.

I have to write about how safe one’s investments are at various brokers soon, in light of the mess at E*Trade.  Can you get me a comment regarding your firm’s excess SIPC/FDIC coverage, and the safety of an investor’s money at the firm?  What would happen to an investor with $1 million invested in stocks and options with you if, for some horrible reason, the bottom fell out tomorrow and you guys went bankrupt? 

The responses are coming in, and will be in my next column, which will appear a week from tomorrow. 

Wednesday, November 14, 2007

E*Trade's Mortgage Losses Lead to Customer Exodus

A few days ago, a Citibank analyst put E*Trade’s stock (ticker: ETFC) on their “Sell” list, and went so far as to declare the firm a candidate for bankruptcy.  The stock price fell off a cliff on Monday, though it has recovered some of the ground lost in the last few days, and fired up takeover chatter once again.

The other activity fired up was the flight of customer assets.  Several competitors have been in touch with me this week to report a huge uptick in new accounts, primarily attributable to E*Trade customers getting their assets out.

I dropped into the local Fidelity office today, where a manager said that they have had over $150 million moved from E*Trade to Fidelity (http://www.fidelity.com) since Monday in the San Francisco Bay Area alone.  Nationally, he says the total is close to $1 billion.  ONE BILLION!  I was amazed by that figure. 

Don Montanaro at TradeKing (http://www.tradeking.com) says TradeKing is averaging 10 calls per hour since Monday morning from people identifying themselves as E*Trade account holders with concerns about their assets and who are looking for a safe place to put their money.  Nearly one-third of TradeKing’s online customer service chat sessions have been taken up by E*Trade customers looking for more information.  Callers specifically seem to be hunting for brokerages outside the sub-prime arena that will not cost them a large increase in trading fees.  And some clients holding both E*Trade and TradeKing accounts have already begun the process of transferring assets from E*Trade into TradeKing accounts.

At optionsXpress (http://www.optionsxpress.com), the new accounts desk is also extremely busy helping E*Trade customers move their accounts. 

So, hould E*Trade customers jump ship?

E*Trade officials say the discount broker and banking operation is in no danger of going bankrupt. Corporate Communications Vice President Pam Erickson said via e-mail: “We take exception to the sensationalism based on unfounded speculation,” referring to the Citigroup report that spooked the market.

Sandler O’Neill principal Richard Repetto said, “Customers should generally remain calm. The broker is insured by SIPC customer insurance and the bank by FDIC. I think the customers with balances above the levels covered by the insurance should not panic as [E*Trade] has alternatives to fund and support their bank and broker.” Repetto is saying that customers don’t have to worry about losing their assets above the SIPC/FDIC coverage level because ETFC will cover it and won’t go bankrupt.

SIPC insurance covers up to $500,000 in securities in each customer account, while FDIC insurance covers up to $100,000 in cash.