As the financial system crumbles, the impact on the individual investor and their stock dividends is unclear. With major Wall Street firms collapsing, insurance companies failing, and banks struggling to survive, billions of dollars in stock valuation has disappeared.
Will your retirement account do the same?
This is serious business and investors need to pay close attention. This is no time to fall asleep at the wheel! For example, I have a dear friend who sold his business a couple years ago. The windfall he received in dividends from the sale was enormous, and provided financial security for the rest of his life.
He proceeded to take the cash from the sale and open a wealth management account with Wachovia Bank (WB). His team at WB made suggestions as to how to properly diversify his wealth across a wide variety of asset classes. Ultimately, his account was invested in dividend-paying stocks, bonds, money market accounts, short-term treasuries and various lucrative hedge funds. At the time, the strategy was sound for someone in his early 40’s planning for the future.
All was good or so it seemed. Even with the downturn in the market his portfolio was outperforming. He may not have been making money, but he sure wasn’t losing as much as the rest of the market. WB was doing an excellent job.
Last spring, when the credit crisis ripped apart down Bear Stearns (BS) and IndyMac (IDMC), I suggested that he start to think about the ramifications for his accounts should WB fail (see “.
I think he thought I was nuts. WB fail?
I figured if I were in his shoes, I’d want to know exactly what would happen to my money if in case, the institution managing my assets failed. This is especially true when the assets are deployed into various instruments via various institutions.
Is my money safe in a bank?
Am I exposed to excessive broker risk?
What about the solvency of the hedge funds I invested in?
Stock Market Sense: Play it Safe
Specifically, I would want to know the risk of each banking institution and how I am protected. We all know that bank deposits are insured up to $100,000 by the FDIC, but what about everything else? (see also, “5 “Secret” Ways Banks Take Your Money“).
We know that stock broker assets are insured by the SIPC up to $500,000, but what many investors may not know is that…> hedge fund assets are not covered. Investors can take solace in the fact that brokerage firms must segregate their customer accounts. That means assets are not commingled with assets owned by the stock broker.
Sounds good, but I’ve seen what happens when a stock broker fails, the liquidation of accounts is never a smooth process. Yes, ultimately assets are recovered, but in some cases large customers only receive a portion of their accounts (see also, “Beware of These 5 Broker Tricks“).
This is caused by the type of investments held in the account and the liquidation thereof. It is quite complex, and that’s why I suggested to my friend that he understand all of the details should WB fail. I sufficiently spooked him so that he did ask the question of his team earlier this summer. The response was predictable: They told him his broker accounts were protected, but his hedge fund investments were not.
WB: Another Bank That Could Go Bust
Flash forward to today and we are now looking at the very real possibility that could WB fail. As crazy as this may sound, my advice to him is to close all of his accounts immediately. Why take the chance? He needs to put his money where solvency is not an issue.
Along with everyone else, it seems WB has made some very bad bets that have unfortunately put its business in peril. As much as my friend may like working with Wachovia’s stock brokers, it doesn’t sense to take that kind of risk. He’s a young guy with a fairly large nest egg. Not to mention, there are plenty of institutions that are in better financial shape and would love to work with him and his account.
There may be a small expense to pay for changing horses, but that price is much less than dealing with the entrails of a Wachovia collapse. That being said, I like WB as an institution, having written about the bank previously (see “Wachovia’s Steel Resolve“).
I have no idea if they will survive or not, but from a personal financial management perspective, keeping my account with a bank or broker that’s in financial distress makes no sense. I’m not saying this is not the time to panic, nor to make a run on your bank. This is just Rational planning and responsible money management. Others in a similar spot should consider doing the same.
Be careful out there. Now’s not the time to be playing “Risk” with your retirement!
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight likes this, go to: www.InvestorPlace.com.