AIRE in the News • Cash and the Safety of Assets • Upcoming Events!
Monthly AIRE Perspectives – March 2023
Dear Friends and Valued Clients,
Please see below for The MAP – Monthly AIRE Perspectives for this month.
AIRE Advisors in the News
We are pleased to have recently been featured in VoyageLA’s “Hidden Gems” stories. Please click here to read the story and interview.
On Cash and the Safety of Assets
With today’s news on the collapse of Silicon Valley Bank (SVB), we felt it would be useful to discuss the safety of assets held at banks and brokerage firms, and review how FDIC insurance works for banks and SIPC works for brokerage accounts.
First, let’s discuss banks. When you deposit your assets at a bank, the bank essentially can use your money to lend to others, and can commingle your money with the bank’s other assets. Therefore, if a bank goes bankrupt, any assets you have at the bank above FDIC limits are at risk (although there is often a chance of some recovery).
FDIC is an arm of the United States government, and its backing is very important, as funds within FDIC limits are ultimately protected by the full faith and credit of the US government. In the case of a bank insolvency, assets within FDIC limits are usually paid back by within a few business days, and often by the next business day. Here is generally how FDIC insurance works: FDIC covers deposits at each bank for up to $250,000 per name on an account. For individual accounts, retirement accounts or corporate accounts, the coverage is $250,000. For joint accounts, the coverage is $250,000 per name on the account, so if it’s 3 people, the account is covered for $750,000, for example. For revocable trust accounts (i.e. living trusts or family trusts), the number of “people” covered at $250,000 each is calculated as follows: trustees x beneficiaries. For example, if there are two parents who are trustees, with three kids as beneficiaries, the insurance coverage is 2 x 3 x $250,000, for a total of $1.5 million in FDIC coverage per bank. If there are two parents and one child, the coverage is 2 x 1 x $250,000, for a total of $500,000 per bank.
It is important to know how much coverage you have for your assets at the bank. Generally speaking, we recommend never to hold assets at any bank beyond FDIC limits. If you have funds above those limits, we would recommend either adding additional banks or considering brokerage firms.
Now, let’s discuss brokerage accounts, such as accounts at major firms such as Fidelity, Charles Schwab, Merrill Lynch, Morgan Stanley and others. When you deposit funds into brokerage accounts, your assets are segregated and not commingled with the assets of the firm. That means that they are held in a completely separate “vault” from the assets of the company, and they areyour assets. So if a brokerage firm becomes insolvent, it normally has no impact on the investors’ assets, as those assets are held separately. SIPC, which covers brokerage assets similarly to FDIC for banks, is also an arm of the US government, protects brokerage accounts for up to $500,000, with a $250,000 limit for cash. However, it is important to note that SIPC coverage is really only there if assets were not segregated properly by the brokerage firm, due to fraud or error. This is a very low likelihood scenario, as the books and records of brokerage companies are stringently audited regularly both internally and externally.
Additionally, assets at brokerage firms are often not left in pure cash. Most cash assets are either held in an FDIC insured bank deposit account within the brokerage account, which is usually backed by multiple banks, or held in money market funds. If the cash is held in an FDIC insured bank deposit account, then it once again becomes subject to FDIC limits, so it is important not to keep more than those limits in such an account. Money markets are ultra-short term funds that invest in either high quality corporate, municipal or government debt, and have a goal of always maintaining a $1 per share value. These funds are not guaranteed, but the risk of “breaking the buck,” or dropping below the $1 share price, is historically very low. In fact, of the thousands of money market funds that have been in existence over many years, only two have ever dropped below $1, and those were fudns that did buy corporate debt. While still not guaranteed, no money market fund that invests in US treasuries has ever broken the $1 share price, as it is invested directly in US government bonds.
At this time, AIRE ADvisors uses the Fidelity Government Cash Reserves as our choice for cash sweeps. The fund is currently paying a rate of 4.34% and is in government paper only. Should you have questions about cash management and the safety of assets, please feel free to contact us at any time.
Save the Date: Upcoming Events!
For the second quarter, we will have two special events for clients and friends. On April 25th at 1pm PT, Fidelity has allowed us access to their cybersecurity expert, who will present an exclusive web-based session for AIRE clients on the topic of cybersecurity. You will learn important and actionable takeaways to help protect you and your family from cybersecurity threats. More info to follow.
As we mentioned on last month’s MAP, we just concluded our annual research project, which resulted in a few changes to some of our ETF choices. Of particular note was the addition of a few ETFs from Dimensional Fund Advisors and from Avantis Investors. On May 16th at noon PT, we will be a holding an exclusive event at the headquarters of Dimensional Fund Advisors in Santa Monica to review their methodology and some of the findings of our research that led us to add their ETFs to our portfolios. This will be an insightful and educational session, and lunch will be served. The official invitation to this event will be out next month.
To give you a glimpse of the alignment of our message with Dimensional’s, we want to share with you a video featuring Dimensional’s Co-CEO and CIO Gerard O’Reilly: “When It Comes to Markets, Better to Plan Than Predict.” If the title of that sounds familiar, it is because it is (coincidentally) almost identical to the topic of our top seminar: “Essential Lessons in Investing: Asset Allocation and Planning Versus Predicting,” which we presented at last week’s live in-person and livestream event. The video replay of that presentation is being edited and will get it to you in the next few weeks.
Once again, we would like to thank you for your trust and loyalty, and look forward to speaking with you in the upcoming month.
The commentary and opinions expressed in our articles on this page reflects the personal opinions, viewpoints and analyses of the AIRE Advisors, LLC employees writing the article. The articles on our website should not be regarded as a description of advisory services provided by our firm or performance returns of any AIRE Advisors, LLC’s clients. Any past performance discussed in these articles is no guarantee of future results. The views reflected in the articles are general in nature and made to provide education about the financial industry. These views and opinions are subject to change without notice. Any mention of a particular security, sector, and related performance data is not a recommendation to buy or sell that security or in that sector. Our firm manages client accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the articles. To determine what kind of investments may be appropriate for you, please consult your financial advisor prior to investing. Also, please note that all investing involves risk and the possible loss of principal capital.
In addition, AIRE Advisors, LLC may provide links hyperlinks for your convenience to websites produced by other providers of industry related material. Accessing websites through links directs you away from our website. Our firm is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.