> SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Emphasis mine.
If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash.
If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.
I think that just keeps people from making claims against the stocks they bought going down in price. A checking account holding dollars isn't going to lose protection because Robinhood the company invested in some stocks.
Aside from that, it appears they're investing this money in short-term treasuries rather than stocks, making up the difference in merchant fees for debit card transactions, and maybe treating this as a loss leader. They've partnered with Sutton Bank since they don't have their own banking license.
>So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
FWIW, some Vanguard bond mutual funds (most of the investment-grade ones) allow you to write checks against them, and those funds can lose value.
I can't find an easy link that says which specific ones, but here's their policy:
Note: this isn't a general checking account that permits debit card usage, and each check must be for at least $250. But right now, you can use their Prime money market fund, which aims to avoid loss of capital ("breaking the buck" is very rare) and write checks against it, and it yields ~2.3%
What are securities in this context? Is that not something that you personally choose to invest in?
Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk.
If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
I don't think understand that correctly. There's no such thing as a SIPC-protected checking account that holds securities. A checking account holds cash.
There's SIPC protection for your cash and securities (stocks etc.) that Robinhood holds for you, up to 250,000$ each. For obvious reasons, the value of a security in dollars fluctuates and therefore such losses cannot be insured. What is being recovered is the securities themselves, not their dollar value at a time of your choosing.
> I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
Actual banks hold only a small fraction of cash deposits in reserve, many of their assets may just as well turn out to be made up of bad loans, bad junk bonds and bad stocks. That's how banks can fail even without a bank run.
I don’t think that’s accurate. It’s primarily to make it clear to people that securities can lose 100% of their value. There is no guarantee.
But cash in a checking account is not going to suddenly start showing negative returns.
The only example I can think of what you’re referring to is the new Betterment checking account which is basically like a security masquerading as a riskier savings account.
I am not sure about that. It's how you are holding the money and not Robinhood. When I put 100,000 in cash in Robinhood and I am not converting it into to some Robinhood tokens that get appreciated by 3% every year. I keep it in USD. So it should be cash as per the SIPC definitions.
> When the return is higher, the risk must have gone up too, somehow.
I want to emphasize this point. You are never* getting returns for free, you are getting paid to take on some risk. If someone is trying to sell you "risk-free" returns that are higher than widely-known market rates, they are lying to you by downplaying, omitting or obfuscating the risk associated with those returns, and warning bells should be going off in your head. Proceed with caution.
* You can of course find better risk-adjusted returns than the market by way of information asymmetry in your favor. Suffice it to say that is not the case with a consumer financial instrument aimed at "the masses" (not high net worth individuals).
Banks who petition the Fed for FDIC insurance face much stricter reporting rules, capital reserve requirements, and limits on the riskiness investments they can make with client deposits from FINRA and the SEC. If you wanted, you could view the lack of FDIC insurance as a sign of a riskier institution overall, but like any other investment it might be worth it for the higher rate.
Just FYI, AFAIK, the standard 10 percent fractional reserve rate is no longer law after legislation post 08 crash bankers slipped through. So that old rule is very often not the case at a bank anymore.
You shouldn’t store more than $250k in cash in any kind of bank or brokerage due to the insurance limit (unless the bank has account insurance beyond $250k.) Investments are different, of course.
Edit: I forgot about the details of the limit. Thank you all.
Brokerages love fat cats and most provide free high quality additional insurance up to at least 5-10M. What happens if brokerage fails? My bet is its insurance, reinsurance or gov't would bail investors out (ask Lehman clients many of whom had accounts a LOT bigger than 250k). My guess is that it is safe to keep at least 5M in a single brokerage, but decide for yourself.
IANAL, but I doubt FDIC vs SIPC matters for an average consumer. If either fails it would almost certainly cause a major run on banks and/or a systemic money transfers failure. Thus it is much cheaper for the gov't to print more money than suffer such consequences.
And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).
snowwrestler|7 years ago
> SIPC insurance provides protection for your cash balance and securities holdings if Robinhood fails financially, but does not cover investment losses due to declines in the value of securities themselves.
Emphasis mine.
If you put $250,000 into an FDIC-protected checking account, that account holds cash and FDIC protects the full amount of that cash.
If you put $250,000 in an SIPC-protected brokerage account, that account holds both cash and securities, and SIPC does not protect you from a decline in the market value of those securities. So imagine the stock market drops and you go to your "checking account" and that has dropped too! To me, the concept of such a "checking account" violates my basic assumptions of how I think about my cash holdings vs. my security holdings.
I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It also seems like there could be weird tax implications if your "checking account" has to liquidate securities to cover a big check you wrote.
DennisP|7 years ago
Aside from that, it appears they're investing this money in short-term treasuries rather than stocks, making up the difference in merchant fees for debit card transactions, and maybe treating this as a loss leader. They've partnered with Sutton Bank since they don't have their own banking license.
https://www.forbes.com/sites/jeffkauflin/2018/12/13/in-a-bol...
SilasX|7 years ago
FWIW, some Vanguard bond mutual funds (most of the investment-grade ones) allow you to write checks against them, and those funds can lose value.
I can't find an easy link that says which specific ones, but here's their policy:
https://personal.vanguard.com/us/whatweoffer/accountservices...
Note: this isn't a general checking account that permits debit card usage, and each check must be for at least $250. But right now, you can use their Prime money market fund, which aims to avoid loss of capital ("breaking the buck" is very rare) and write checks against it, and it yields ~2.3%
https://investor.vanguard.com/mutual-funds/profile/VMMXX
dmortin|7 years ago
So I won't buy any securities, just use it as a checking account, keeping the cash sitting there earning the 3% interest.
I wonder if there is a rule of Robinhood which prevents me doing this.
mcv|7 years ago
Because if it is, then this is basically the same. Your cash is fully insured, but obviously your investments run investment risk.
If Robinhood automatically converts your money into securities, then it's a different matter. It sounds unlikely to me that any bank account would work that way, but I don't know how Robinhood works.
zeroname|7 years ago
There's SIPC protection for your cash and securities (stocks etc.) that Robinhood holds for you, up to 250,000$ each. For obvious reasons, the value of a security in dollars fluctuates and therefore such losses cannot be insured. What is being recovered is the securities themselves, not their dollar value at a time of your choosing.
> I don't know how that percentage of cash/securities breaks down at Robinhood, but it's not going to be 100% cash and 0% securities. There is a reason big banks don't offer checking accounts with 3% interest rates. When the return is higher, the risk must have gone up too, somehow.
It's not the cash/securities that Robinhood holds as part of their business, it's the one they hold for you. You may well choose to hold 100% cash or 100% securities.
Actual banks hold only a small fraction of cash deposits in reserve, many of their assets may just as well turn out to be made up of bad loans, bad junk bonds and bad stocks. That's how banks can fail even without a bank run.
eeeeeeeeeeeee|7 years ago
But cash in a checking account is not going to suddenly start showing negative returns.
The only example I can think of what you’re referring to is the new Betterment checking account which is basically like a security masquerading as a riskier savings account.
what_ever|7 years ago
But I am not an expert and don't take my advice.
graedus|7 years ago
I want to emphasize this point. You are never* getting returns for free, you are getting paid to take on some risk. If someone is trying to sell you "risk-free" returns that are higher than widely-known market rates, they are lying to you by downplaying, omitting or obfuscating the risk associated with those returns, and warning bells should be going off in your head. Proceed with caution.
* You can of course find better risk-adjusted returns than the market by way of information asymmetry in your favor. Suffice it to say that is not the case with a consumer financial instrument aimed at "the masses" (not high net worth individuals).
unknown|7 years ago
[deleted]
pbreit|7 years ago
nitsuaeekcm|7 years ago
arminiusreturns|7 years ago
cjensen|7 years ago
No private insurance company can provide such guarantees and keep then if the entire sector needs to be bailed out at the same time.
hn_throwaway_99|7 years ago
siftikha|7 years ago
robraven|7 years ago
1123581321|7 years ago
Edit: I forgot about the details of the limit. Thank you all.
ptero|7 years ago
unknown|7 years ago
[deleted]
ptero|7 years ago
And if the gov't really wanted to weasel out of FDIC there are plenty of loopholes. For example, I think FDIC can take a long time (up to 10 years?) to pay and is not adjusted for inflation, so inflate, wait and pay pre-inflate amounts is an option (stupid, but technically possible).