“Is My Money Safe?!” A Crucial Question—and Our Detailed Answer

There are many examples of financial scandals along with bank and financial firm failures in the 21st century. Bernie Madoff tops the list for defrauding his clients of $85 billion (discovered in 2008). More recently Sam Bankman-Fried was sentenced (in 2024) for stealing $8 billion from customers of FTX. There were 440 bank failures between 2009 and 2012 and five more in 2023 (including Silicon Valley Bank and Signature Bank of New York). In 2008 both the Lehman Brothers and Bear Stearns financial firms failed.

It is definitely appropriate for investors to ask, “How am I protected? IS MY MONEY SAFE?!”

First, let’s identify four categories of financial risk that investors face:

1. Investment risk is the risk that investments may fail to produce their expected return.
2. Diversification risk is the potential loss from having too much invested in a specific company, explicit industry, or small geographic area, etc.
3. Custodial risk. What happens to your investments if your custodian (i.e., Schwab) collapses?
4. Fraud, theft, or errors can occur with any custodian or advisor. Bernie Madoff is the best-known example of fraud and theft. All humans and organizations have the potential to make errors so it is important to know how you are protected if that happens.

This article isn’t intended to be about investment risk or diversification risk. But let’s briefly address them anyway for clarity.

Investment risk

You’ve probably heard it before: “risk and reward are related”. Equities are inherently risky. The upside is they also have one of the strongest levels of reward for the risk taken. Pairing equity risk with short-term, investment grade fixed income in your portfolio, at a ratio that meets your comfort and needs, will hopefully allow you to stick with a long-term plan and realize the expected return.

Public markets are safer than ever before in history. They are more transparent, highly monitored, and better regulated. We also have greater academic knowledge about the ways to harness the equity market through global allocation, low costs, and utilizing multiple asset classes to optimize diversification.

Diversification risk

Diversification reduces Investment Risk to some degree. One single stock is always going to have greater risk than a portfolio of 500 stocks. Likewise, a single asset class of stocks (such as the S&P 500) will have more risk than multiple global classes of stocks — like the portfolio model that Resource Consulting Group (RCG) utilizes. 

Now let’s address the two categories of risk that are the real subjects of this article: How are you protected from custodial risk and risk of fraud, theft or errors?

Who is Your Primary Custodian?

Investors rely on their custodian to ensure the safe-keeping of their money. Your primary custodian is Charles Schwab & Company.

Schwab has custody and holds your mutual funds, cash, stocks, and other investments. Schwab executes trades (as instructed by RCG) then provides trade confirmations and monthly statements to the investor. But your investments are not owned by Schwab or subjected to their creditors.

What Happens if Schwab Goes Bankrupt or Out of Business?

The first thing to know is that despite the market downturn in 2008, anyone who had custodied their investments at Lehman Brothers or Bear Stearns at the time did not lose a single share of stock, bond, mutual fund, or cash. Custodial assets are not the legal property of the custodian and are not subject to the claims of creditors. Those investment accounts are separated from the assets of the custodian and are not at risk. If a custodian fails or goes out of business, all your investments will be transferred to another custodian intact.

However, if you (an investor) bought shares of stock in Lehman Brothers or Bear Stearns, then that investment would have gone to nothing — or close to nothing. And that would have happened regardless of where you custodied those stocks. Some stocks do become worthless, but that is not a custodial issue. 

You Have Invisible Custodians, Too. 

There are other custodians behind the scenes. As an example, Dimensional Fund Advisors does not have custody of the mutual funds they manage. Their custodians are State Street and Citibank. Dimensional is creating and managing mutual funds. They don’t want the added job of also being custodian. Likewise, Vanguard and BlackRock do not have custody of the mutual funds they create and manage. Among their custodians are J.P. Morgan, BNY Mellon, and State Street Bank.

To your benefit, each of these custodians (primary and invisible) adds a layer of protection and a separation of duties to ensure that the fund companies cannot misuse or access funds without proper authorization. If things don’t reconcile, then “alarms” go off until things are reconciled.

What Safeguards Are in Place to Prevent a Custodian from Committing Fraud or Theft?

It is extremely difficult for a custodial employee to steal client wealth for several reasons. Custodians have robust compliance and tracking systems. Each time an employee makes any change to an account, they must log in, and everything is tracked back to that individual employee. The custodian has an internal system to audit each account regularly. Also, every account is reconciled daily by the custodian. Furthermore, the SEC monitors all broker-dealer activity by requiring them to have external auditors come in annually to check all account activity. Finally, RCG also reconciles daily and if another system failed, our information would not reconcile to the custodian’s and again “alarms” would go off until things are reconciled.

Despite safeguards, how are you protected if there is a custodial business failure, a theft, or fraud?

We all know that theft and fraud still occur, even with all these safeguards in place. Several sources of restoration are available if it happens.

The SEC has stringent rules in place for all broker-dealers (Schwab) to protect clients’ money. One important rule is the Net Capital Rule (15c3-1), which ensures that broker-dealers maintain “sufficient liquid capital” to protect the assets of customers and to meet their responsibilities to other broker-dealers.

In addition to the capital requirements above, the Securities Investor Protection Act of 1970 (SIPA) requires all broker-dealers to be part of the Securities Investor Protection Corporation (SIPC). Broker-dealers pay an assessment (a premium) based on the size of their business. SIPC insures each customer for up to $500,000 of which up to $250,000 may be in cash.

Finally, Schwab has additional insurance through Lloyd’s of London of up to $150 million per client loss, of which $1,150,000 may be in cash.  Schwab also has insurance for errors and omissions, crime, and third-party cyber liability.

What About Cash and Money Market Funds?

Money market funds at Charles Schwab are treated like securities in a brokerage firm. These funds are protected by SIPC up to $500,000 (including $250,000 for cash). Then, additional coverage from Lloyd’s of London and other insurers, reaching $600 million in total, but with a combined customer return limit of $150 million, including up to $1,150,000 in cash.

You can see that a brokerage firm has much higher protection limits for cash and money market funds than bank FDIC limits.

How Does RCG Help Protect You from Fraud, Theft, and Errors?

How did Bernie Madoff manage to defraud clients for so many years? He did it by excluding or limiting most of the protections listed above. He had custody and investment discretion of clients’ money. He did not have professional liability insurance. He paid off a “small-time” CPA/auditor to look the other way. His internal records did not reconcile to reality — he essentially “cooked the books” — but no one outside the firm had oversight. And various internal colleagues cooperated or looked the other way.

Here at RCG, you have multiple external organizations (Schwab, Dimensional, Vanguard, BlackRock) all doing their own due diligence daily. Like the brokerage firms, RCG has systems and processes in place to hold employees accountable. Trading always involves two advisors with a certain level of experience. Trades and account values are reconciled daily. Our Compliance Department monitors the regulations and our systems for compliance. As a result of prior national frauds, compliance regulations have steadily increased in the 21st century.

And just in case, RCG also has several types of insurance plans to help protect clients.

For trade errors made in a client account based on a process failure on RCG’s part, RCG maintains Errors and Omissions insurance. This covers clients for losses sustained from a trade error made by our team in your account. Another type of insurance we carry is known as the Fidelity/Crime bond. This covers clients for actual theft of assets. For example, if RCG processes a fraudulent wire transfer even after confirming the details with a client, the Fidelity Bond is intended to cover the proceeds that were transferred. Finally, RCG maintains cybersecurity insurance to protect clients from theft of data assets due to cyberbreach. 

Sometimes we hear clients talk about the risk of “having all your eggs in one basket”. Bernie Madoff is a good example of that metaphor. However, having all your money with RCG is the extreme opposite. In addition to the multiple organizations (visible and behind the scenes), your portfolio is spread out among over 18,000 stocks and over 7,000 bonds with three different mutual fund companies (Dimensional, Vanguard and BlackRock).

In Conclusion

There are several safeguards in place to help protect your assets from fraud, theft and errors.  Let us know if you have any specific questions.