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March 17, 2023

In the aftermath of the recent US banking headlines, I know that many of my clients are concerned about the safety and security of their investments. That's why I want to take a moment to reassure my clients and explain the protections that are in place to safeguard their assets.  Let me reassure you that the banking turmoil we have seen over the past two weeks is quite different than turmoil striking broker dealers and custodians of financial assets. 

One of the key questions that investors often ask is about the difference between FDIC and SIPC, and which one applies to their accounts. The answer is that FDIC and SIPC are two separate organizations with different mandates and limits on coverage. FDIC, or the Federal Deposit Insurance Corporation, only covers bank deposits, while SIPC, or the Securities Investor Protection Corporation, covers investment accounts held with broker-dealers.

So, what happens if a broker-dealer fails? This is a scenario that many investors worry about, but it's important to understand that it is highly unlikely to happen. Broker-dealers are subject to strict regulations and oversight, and SIPC is in place to provide an additional layer of protection for investors in the event of a failure.

We are independent advisors here at Harvest Investment Strategies meaning that we have the flexibility to work with different custodians, so your relationship with us would continue as normal and we'd be there the entire time to facilitate the process for you in the event of a broker-dealer failure.  The first step would be that SIPC would step in to facilitate the transfer of securities to a new custodian or issue certificates for the value of the securities. 

Let's look at a quick example, let's say that a client had a $2 million investment account that was 90% invested in publicly traded equities and 10% in cash held inside of a money market fund. In the event of a broker-dealer failure, SIPC would cover up to $500,000 in securities and cash, including the $200,000 in cash held in the money market fund. The remaining $1.5 million in equities would be transferred to a new custodian, or the client could opt to receive certificates for the value of the securities.  As a shareholder of publicly traded companies, there is a record of your ownership, and therefore you would not lose that ownership. This is significantly different than a bank deposit. 

Of course, the process of recovering securities and transferring them to a new custodian can be complex and time-consuming. That's where financial advisors like me come in. We are here to help guide our clients through the process and ensure that their assets are protected. We can work with clients to transfer their accounts to a new custodian, provide guidance on how to recover their securities, and answer any questions they may have.

In conclusion, I want to emphasize that the scenario of a broker-dealer failure is highly unlikely, and that investors' accounts are generally safe and secure. We just wanted to create understanding about the protections that are in place.