Tad Borek <borekfm[at]pacbell.net> writes:

- quote -

That's why I don't write checks against my brokerage account
and don't have an ATM card against it. :-) I do all payments
(either physical checks or online billpay) from a bank checking
account that never has much money in it and which is linked to
the brokerage account such that I can push money out to it from
the brokerage account or pull money from it into the brokerage
account.

- quote -

True, but many brokers will gross them up. For example, Fido
will assume you're in the top tax bracket and will pay you
compensation such that after tax (including tax on the compensation)
you'll be where you'd be if you had gotten qualified dividends.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Rich Carreiro wrote:
- quote -


Maybe I should give it more attention but I never think of broker
failure as a significant risk factor. To my knowledge it's been mostly
local boiler rooms, and even those are a relatively small number. It
seems there would be plenty of warning if one of the biggies was on it
way to failure - I'm thinking of eTrade's early years, when they
accidentally commingled client & firm assets, some relatively small
amount like $100k. It was front page news at the time, the regulatory
reporting picked it up (and I closed my account to avoid any "broker
meltdown" risk). Brokers are heavily regulated and in theory, DTC is
making sure they're not playing around with margin accounting (naked
shorting stories to the contrary!).

The bigger risks of a margin account, IMO, are:

1. If you have cash-management on the account, someone could write a
very fat check or ATM/debit against the account, and it would be
honored. Similarly your ATM slip may show a very fat balance available
for withdrawal, giving an ATM-thug a reason to bop you over the head if
you don't withdraw, you know, $40,000. "But I might get a margin call"
doesn't work so well!

2. if your securities have been loaned out you receive substituted
payments (effectively, interest) instead of qualified dividends, doing
away with the tax benefits of dividend income.

-Tad

I <nNeEwTs[at]sonic.net> wrote in message
news:444410b3$0$1496$742ec2ed[at]news.sonic.net...
- quote -

Sigh, 2004. I must be getting old.

- quote -

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m3u08sqbip.fsf[at]animato.home.lan...
- quote -

Thanks for the information. Upon closer examination, I see most of the
brokers I checked don't say who provides their excess SIPC insurance. (Lack
of disclosure does not leave me with warm fuzzy feelings.) One exception I
found is TD Waterhouse, that says explicitly that they use Lloyd's of
London.
http://www.tdwaterhouse.com/shared/f...nce_pop.asp?#1

Other background info I found include:
http://www.businessweek.com/magazine...9156_mz070.htm (1994
BusinessWeek article repeating much of the detail you wrote in your post,
and concluding that if brokers are using excess SIPC coverage as a selling
point, should they disclose how they provide it)

http://www.lpl.com/html/downloads/MKT135faq-1003.pdf (Q&A from LPL Financial
Services on what SIPC insurance is, what the historical losses at brokerages
have been, what happened with excess SIPC insurance, etc.)

http://www.capcoexcess.com/USA/questions.html
CAPCO site - their Q&A page. This page says that there are now 15 member
firms; other pages say that it was founded by 14 members (as Rich reported),
and provide the complete list of 18 broker/dealers insured by CAPCO.

Finally, FWIW, the LPL Q&A says that in a period of 32 years, 0.3% of
eligible investors had claims in excess of SIPC limits; but excess SIPC
coverage has never been tested, because these cases involved broker/dealers
without excess SIPC coverage.

--
Mark Freeland
nNeEwTs[at]sonic.net

Or at least makes it harder to collect on?

This may be old hat to you RIA types, but there was a
very interesting article in this month's AAII magazine,
by John Deyser (manager of PVFIX) talking about SIPC and
what types of supplemental coverage brokers have.

For example, I didn't know that all three providers
of excess SIPC insurance (AIG, Travelers, and Radian)
departed the excess SIPC business in late 2003.

Or that 14 broker/dealers formed their own captive
insurer (CAPCO) for excess SIPC claims (and CAPCO
won't say how much capital it has to absorb excess
SIPC losses, though S&P rates it A+) Or that some
other broker/dealers use Lloyd's.

But tying in with the subject line of this post, I also
didn't realize that a margin account can make things
more difficult if your brokerage fails. The reason,
accorning to Deysher, is that if any of the securities
you own happen to be lent out when your broker fails,
the borrowing broker may be unwilling to return the shares
(even when the short position is covered) until its own
claims against the failed brokerage are settled -- so
account holders who have had shares lent out will become
unsecured creditors of the failed brokerage. In addition
to the risk of becoming an unsecured creditor, there's
also the simple time issue -- it could take a lot longer
to get back shares lent out than to take possession of
shares in the cash side of your account. For both these
reasons, Deysher recommends keeping everything journaled
to the cash side of your account, and only journaling
selected holdings to the margin side when you have an
explicit need for a margin loan. He said he practices
this with his personal accounts.

Thought readers would find this interesting.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us