Banking vs Brokerage Question for Deposits or Stock Holdings

[Saluki]

Even during the great financial crisis, when firms were going under, I don't recall their customers stock positions being affected. SIPC only goes $500k (vs $250k for FDIC).  But I've heard Buffett say that he's not concerned about their stock positions if their broker goes under (is this because they are not held in street name, or because it's not really a risk?). 

 

I see that SIVB depositors are getting bailed out, and I was surprised to see that Roku had half a billion dollars in cash there.  But why wouldn't the treasurer or CFO of a public company keep most of the money in short term treasuries instead of a bank account?  Aside from what you need to make payroll, keeping more money in your bank account than you need to pay bills seems like a unnecessary risk to take.  If Roku had an account with, say, Charles Schwab and kept that money in 3 month treasuries, instead of a bank account would this be an issue for them if the Bank/Broker wasn't bailed out by the Government?

[tng]

The business model of a brokerage is inherently safer too, as it is mainly a fee driven business. They won't fall into the trap of reaching for yield. I think it's pretty safe for high networth individuals or companies because the broker mainly acts as a custodian and the assets are not comingled with the broker's funds (or shouldn't be, that's what all the audits and federal regulations are suppose to ensure). Technically it is possible for there to be widespread fraud or malfeasance and a lot of client assets are lost, but that's basically impossible at a major brokerage that has many layers of checks and security.

 

Roku keeping so much money at a bank account that probably yields 0% is insane, especially given that you can find good short term yields right now. No idea what the CFO and all the finance people there are doing. I know SIVB offered a lot of perks to leave large sums of money in their bank accounts, such as cheaper rates on loans and credit facilities, etc. It was very favorable for small businesses with a few million dollars. But with hundreds of millions of dollars like Roku, it seems insane.

[StevieV]

This post made me look up the Roku CFO.  Apparently the Roku CFO announced his retirement last year. New CFO named last week.

 

https://finance.yahoo.com/news/dan-jedda-join-roku-chief-133000515.html

[thepupil]

I keep money at Vanguard, Fidelity, Interactive Brokers, Treasury Direct, and Bank of America. I have a HELOC at Third Federal. 
 

I think each one is individually safe, but have selected those based on combo of convenience and perception of safety. 
 

an additional precaution worth taking is to not have a margin account if you don’t need one (I believe more clearly segregated).  
 

I assume at least once in my life, I won’t be able to access one or several of these. My biggest fear of this nature is a cyber attack (I’ve contemplated direct registration but have procrastinated and it’s not compatible with employer required reporting of all my holdings / trades). 
 

these types of risk are very low probability but extreme severity. I always want to be liquid and never want my liquidity to be dependent on one corporation. 

[CorpRaider]

I have often wondered if the no fee paid for by securities lending could be taken to excess, causing some surprise losses, but I haven't been able to figure out how it might happen.

[tede02]

1 hour ago, thepupil said:

I always want to be liquid and never want my liquidity to be dependent on one corporation. 

 

This resonates with me. Just before the pandemic hit in early 2020, my wife and I had signed a purchase agreement to buy a property we'd been watching for years. Excitement turned to fear in a matter of weeks in March 2020 because we had signed a purchase agreement to buy, but still needed to sell. I've always been pretty financially conservative but I never felt so naked and sold a few long-term equity positions that had declined but fortunately weren't bombed out (Luckily I was able to buy one back at a lower price a few months later). Everything worked out but I told my wife I NEVER want to feel exposed like that again. As a result, I keep over two-years of living expenses spread across banks, I-Bonds, brokered CDs and short-Treasurys. Jamie Dimon always talks about a fortress balance sheet and that's how I've tried to shape my own.

[Castanza]

11 hours ago, tede02 said:

 

This resonates with me. Just before the pandemic hit in early 2020, my wife and I had signed a purchase agreement to buy a property we'd been watching for years. Excitement turned to fear in a matter of weeks in March 2020 because we had signed a purchase agreement to buy, but still needed to sell. I've always been pretty financially conservative but I never felt so naked and sold a few long-term equity positions that had declined but fortunately weren't bombed out (Luckily I was able to buy one back at a lower price a few months later). Everything worked out but I told my wife I NEVER want to feel exposed like that again. As a result, I keep over two-years of living expenses spread across banks, I-Bonds, brokered CDs and short-Treasurys. Jamie Dimon always talks about a fortress balance sheet and that's how I've tried to shape my own.

 

It's a tough thing to do as the culture the last decade has been "Why pay off loans or hold cash when you can get 7%+ in the market?". Nothing wrong with that thinking, but people miss the stress and fragility that can come with "high capex" lifestyles. Wife and I put investing 2nd to debt and had a goal of paying everything off by 30. Paid the house off this past year and live completely debt free. Feels great not being owned by anyone and not can focus completely on savings and investing moving forward. Did I sacrifice some solid returns but not going 100% in investing and making minimum payments on low interest debt? Yeah I sure did, but you can't put a price on peace of mind. Just my two cents. 

[vinod1]

4 hours ago, Castanza said:

 

It's a tough thing to do as the culture the last decade has been "Why pay off loans or hold cash when you can get 7%+ in the market?". Nothing wrong with that thinking, but people miss the stress and fragility that can come with "high capex" lifestyles. Wife and I put investing 2nd to debt and had a goal of paying everything off by 30. Paid the house off this past year and live completely debt free. Feels great not being owned by anyone and not can focus completely on savings and investing moving forward. Did I sacrifice some solid returns but not going 100% in investing and making minimum payments on low interest debt? Yeah I sure did, but you can't put a price on peace of mind. Just my two cents. 

 

I agree completely that you should do what gives you the most peace of mind. After all what better use of the money?

 

That said, you are leaving a lot of money on the table. If you have a $500k mortgage at under 3% rate for 30 years, you are going to have about $500k less after 30 years due to this - using average balance over the years and 4% higher rate of return than mortgage rate. 

 

Also you still have the real estate taxes that need to be paid. So it is not exactly free and clear ownership even if you paid off the mortgage. It is only a question paying less.

 

Personally I get a kick out of knowing I am paying 2.5% rate, as even the most credit worthy Governments cannot get this rate for most of history for borrowing over 30 years.

[Castanza]

2 minutes ago, vinod1 said:

 

I agree completely that you should do what gives you the most peace of mind. After all what better use of the money?

 

That said, you are leaving a lot of money on the table. If you have a $500k mortgage at under 3% rate for 30 years, you are going to have about $500k less after 30 years due to this - using average balance over the years and 4% higher rate of return than mortgage rate. 

 

Also you still have the real estate taxes that need to be paid. So it is not exactly free and clear ownership even if you paid off the mortgage. It is only a question paying less.

 

Personally I get a kick out of knowing I am paying 2.5% rate, as even the most credit worthy Governments cannot get this rate for most of history for borrowing over 30 years.

 

Yup and I completely understand that perspective. You're probably right I'm taking future cash off the table. But nothing is certain in the future: "Bird in the hand is worth two in the bush". 

 

My risk appetite is more flexible than someone who has a subscription based lifestyle. My cashflow for investments is higher in the near term and gives me more flexibility for other investments. Jobs wise I feel way more flexible and less dependent on the place I work now. 

 

As I said, completely personal opinion and I know historically speaking I am probably losing out on some returns (should history repeat). There is also a life enjoyment aspect to this. I know plenty of people who own 500k+ houses at good rates but their housing costs to income ratios are off. So they are handicapped with investments, savings, and simply going and doing things; something that is often overlooked in my opinion. I don't want to only enjoy life when I'm 65. 

 

Most people invest to be rich but I invest and save to have peace of mind and generally live "free".