How to Keep Your Investments Safe
One thing that is getting little in the way of attention is the question of whether investors should have investments in their name or street name. Many brokerage accounts are automatically opened as margin accounts, or with margin features, which means if a brokerage runs into trouble, then you become just another creditor.
If you're not willing to take that chance, one suggestion is to transfer your account to a custody-type account at a trust company or bank trust department.
There is an aspect of the credit crisis that has yet to be given focus. So in view of this fact, the question you should be asking yourself is this: Is my money truly safe in either a bank or a brokerage firm account?
Are you aware of the fact that contained in virtually every brokerage firm's standard Account Agreement (generally a Margin Account) is a provision that allows your brokerage to register all your securities in street name, meaning their own? Every security you buy, even if you pay for it in full, belongs to your brokerage firm. And it could be that all you really own is a claim on the firm for those stocks and bonds. Therefore, when securities in your account are held in street name, they are really not your property!
Likewise when you deposit money in a bank account. Your cash isn't sitting in the vault in a box with your name on it. You are simply a creditor of the bank. So maybe you should have read the fine print after all!
For many years, virtually all securities have been held and registered electronically. Thus, most securities have been dematerialized, and exist only on the electronic books of the issuer and an electronic depository house known as DTCC. The securities industry has promoted this practice of holding in street name as good for investors for a variety of reasons. They will tell you that it makes buying and selling much easier for you, collecting interest payments more timely and simple, and even protects you against the loss or theft of those nettlesome stock or bond certificates, while reducing the costs associated with transfers and deposits. These things are all true.
As is typical with most things the brokerage firms and their regulators tell you, however, there is far more to this than meets the eye. In fact, when your securities are held in the name of your brokerage or bank, they, not you, have most of the rights of ownership. The issuer corresponds only with them, and sends them interest and dividend payments, and the forms to vote on corporate issues.
The broker then passes these communications on to you, in the form of envelopes that you may never open or totally ignore. And if you don't vote your proxy, by the way, your broker can then cast those votes on some matters, or possibly lend your stock plus the right to cast the votes to someone else.
But there are some simple things you can do about this. At the very least, only maintain a Margin Account if you absolutely must borrow money against your securities. Otherwise, ask to open a Cash Account, and read the Agreement, being sure that you do not authorize your broker to use your holdings for any purposes you don't like or don't get paid for. Also, instruct your broker in writing to register your securities in your name whenever possible - and get an explanation of any issues or fees this might raise.
But the safest bet is to set up a custodial account at a Trust Bank, and have your securities delivered and/or registered there. Securities held by trust banks for their customers are registered in the name of a separate nominee than the bank's proprietary property at DTCC, and barring fraud or misappropriation, will not get caught up in a bank's insolvency. The bank will manage the paperwork and charge a negotiable custodial fee. And some banks will even do it for free if you agree to do your securities business through them.
And always remember this: Just because something is a common practice doesn't mean it's a good idea. Paying attention to the account agreements you sign makes sense - and often times brokerage houses profit immensely from those small print details, while placing their clients at risk. While the regulatory and ratings agencies are supposed to exercise oversight in protecting investors from predatory or dangerous practices, too often they do so as a cure, rather than as a preventive.
* * * * *
If you're not willing to take that chance, one suggestion is to transfer your account to a custody-type account at a trust company or bank trust department.
There is an aspect of the credit crisis that has yet to be given focus. So in view of this fact, the question you should be asking yourself is this: Is my money truly safe in either a bank or a brokerage firm account?
Are you aware of the fact that contained in virtually every brokerage firm's standard Account Agreement (generally a Margin Account) is a provision that allows your brokerage to register all your securities in street name, meaning their own? Every security you buy, even if you pay for it in full, belongs to your brokerage firm. And it could be that all you really own is a claim on the firm for those stocks and bonds. Therefore, when securities in your account are held in street name, they are really not your property!
Likewise when you deposit money in a bank account. Your cash isn't sitting in the vault in a box with your name on it. You are simply a creditor of the bank. So maybe you should have read the fine print after all!
For many years, virtually all securities have been held and registered electronically. Thus, most securities have been dematerialized, and exist only on the electronic books of the issuer and an electronic depository house known as DTCC. The securities industry has promoted this practice of holding in street name as good for investors for a variety of reasons. They will tell you that it makes buying and selling much easier for you, collecting interest payments more timely and simple, and even protects you against the loss or theft of those nettlesome stock or bond certificates, while reducing the costs associated with transfers and deposits. These things are all true.
As is typical with most things the brokerage firms and their regulators tell you, however, there is far more to this than meets the eye. In fact, when your securities are held in the name of your brokerage or bank, they, not you, have most of the rights of ownership. The issuer corresponds only with them, and sends them interest and dividend payments, and the forms to vote on corporate issues.
The broker then passes these communications on to you, in the form of envelopes that you may never open or totally ignore. And if you don't vote your proxy, by the way, your broker can then cast those votes on some matters, or possibly lend your stock plus the right to cast the votes to someone else.
But there are some simple things you can do about this. At the very least, only maintain a Margin Account if you absolutely must borrow money against your securities. Otherwise, ask to open a Cash Account, and read the Agreement, being sure that you do not authorize your broker to use your holdings for any purposes you don't like or don't get paid for. Also, instruct your broker in writing to register your securities in your name whenever possible - and get an explanation of any issues or fees this might raise.
But the safest bet is to set up a custodial account at a Trust Bank, and have your securities delivered and/or registered there. Securities held by trust banks for their customers are registered in the name of a separate nominee than the bank's proprietary property at DTCC, and barring fraud or misappropriation, will not get caught up in a bank's insolvency. The bank will manage the paperwork and charge a negotiable custodial fee. And some banks will even do it for free if you agree to do your securities business through them.
And always remember this: Just because something is a common practice doesn't mean it's a good idea. Paying attention to the account agreements you sign makes sense - and often times brokerage houses profit immensely from those small print details, while placing their clients at risk. While the regulatory and ratings agencies are supposed to exercise oversight in protecting investors from predatory or dangerous practices, too often they do so as a cure, rather than as a preventive.
* * * * *
posted by Bob Moser at
3:00 PM
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