In choosing a financial provider, understanding the safety of your assets is paramount. High-net-worth investors are more sophisticated and their investment opportunities have become more varied and complex than ever. And as the rate of change increases in the investment arena and the regulatory environment continues to tighten, investors need ready access to comprehensive and real-time information about their investments.
Most securities today are registered in the name of the global asset servicer or investment broker (“nominee”) rather than the name of the individual investor. Whether through a trust bank or a broker-dealer, using street name “nominee” registration has many benefits over direct ownership registration, including:
- Efficient security execution
- Timely trading/transferring of securities between parties
- Simpler and more timely dividend income collection
- Reduced cost of trading, transfers and deposits
- Protection against loss or theft of stock certificates
However, there are several differences between trust banks and broker-dealers that should be considered.
Trust Banks vs. Broker-dealers
Both trust banks and broker-dealers typically hold client assets registered in nominee name. But should a broker-dealer or trust bank become insolvent, clients might be more insulated with a trust bank. Their assets held in trust, investment or custodial accounts are completely separate from the financial conditions of the trust bank and not subject to bank creditors’ claims. If a trust bank were to become insolvent, clients’ assets are secure because they are not assets owned by the bank and therefore are protected.
In contrast, if a broker-dealer were to become insolvent, the Securities Investor Protection Corporation (SIPC) would handle asset transfer to the beneficial owners or as directed by the owner. Client securities are not subject to the rights of general creditors, and client claims for their funds and securities are senior to other claims on the broker-dealer. If a broker-dealer does not have sufficient assets or cash to cover clients’ claims, which should not happen absent violations by the broker-dealer of the rules regarding segregation of client assets, SIPC provides asset protection for up to $500,000 for securities inclusive of $250,000 for claims in cash. However, many broker-dealers have additional asset protection coverage.
All that said, investment assets are not necessarily less safe with a broker-dealer. The size, financial strength and business activities of the broker-dealer all impact the safety of assets.
The type of account and agreement entered into with a broker-dealer also affect the length of time that may elapse before a client receives a return of securities. For example, if a client signs a margin agreement with the broker-dealer, it may be able to lend the client’s securities, which could cause delays in the event of insolvency.
A Secure Foundation
During this period of market volatility, investors are focused particularly on transparency and protecting their assets. Whether using a trust bank or broker-dealer, it is essential for investors to understand and have confidence in how their investment assets will be held.