INSURING YOUR INVESTMENT … DEALER
AN INTRODUCTION TO INSURANCE AND RISK MANAGEMENT – PART 8.3
“Wouldn’t it be nice” … no, I’m not quoting a Beach Boys song. But, wouldn’t it be nice if we could insure our investments against potential losses? The news as I write this is that the US Dow Jones Industrial Average is down over 900 points. According to the headlines, this is largely due to fears of the impact that the Coronavirus will have on the economy. While there are some products that can help you mitigate the risk of investment loss, this post is not about that subject.
Instead, today I want to discuss the protection against loss if your investment dealer were to become insolvent or fail. As is the case with insurance companies and deposit-taking institutions (banks), investment dealers also have their own form of insurance that protects clients if the investment firm that manages their investments goes under.
Canadian Investor Protection Fund (CIPF)
Since the creation of the CIPF in 1969, 21 investment dealers in Canada have failed, the most recent occurring in 2015.
What is an Investment Dealer?
An investment dealer is a firm that is a member of IIROC, the Investment Industry Regulatory Organization of Canada.
What does CIPF do?
The stocks, bonds or other investments that you hold in an investment account are your property. If an investment firm fails, it can no longer carry on business. It cannot hold your investments. In that case, CIPF typically acts to return your assets to you by transferring them to another firm so that you can regain access to them.
What is covered?
CIPF covers the following property: cash, securities, futures contracts and segregated insurance funds. To clarify the term “securities,” you can think of bonds, stocks, mutual funds or exchange-traded funds.
What is not covered?
As the opening paragraph of this post hints at, CIPF does not cover your property simply because it goes down in value. CIPF also does not cover you against bad advice received from your investment advisor. So, if you found that what you had invested in wasn’t suitable for you, you were given misleading information, or important information wasn’t given to you, you need to go elsewhere to look for compensation. I should note as well that if you bought a stock (ahem… Nortel, anyone) that subsequently declined in value so badly that it became insolvent and ceased trading, there is no compensation from CIPF either. CIPF is all about protecting you against the insolvency of a member firm, not of the investments themselves.
How much is covered?
Ideally, CIPF seeks to simply transfer your assets to a new investment firm so that you may carry on, but in the event that your property cannot be fully recovered, there are coverage limits.
What about joint accounts?
Joint accounts are “lumped in” with general accounts. If, for example, you and your spouse each have $500,000 in individual non-registered cash accounts and another $100,000 each in TFSAs you have each used up $600,000 of the $1 million in coverage that you have for general accounts. Let’s further assume that you two have a joint margin account. CIPF assumes that a joint account owned by two people is divided in ownership proportionately, 50% belonging to each. A joint account owned by three people is divided 3 ways, so 33 1/3 percent for each. And so on. In this example, $500,000 of the $1 million would be included in the coverage that each spouse has for general accounts. Since $600,000 has already been used by each spouse in the general category, then the total amount of property in the general category is $1,100,000 each. As the property exceeds $1 million, each spouse lacks coverage for $100,000 of their investments.
The following is a table of the investments of a hypothetical married couple with two children.
The General Account Category is described as above: The $1 million joint margin account lacks full CIPF coverage because each spouse has already used up $600,000 of their general coverage on their individual cash and TFSA accounts so what remains is $400,000 each, or $800,000 in total, thus leaving exposed $200,000 of the $1,000,000 in assets in the joint account. The Registered Retirement Account Category is separately protected up to $1 million each so their two RRSP accounts are fully covered. The same applies in the Registered Education Account Category, so the RESP for the couple’s two children is fully covered.
What do I do?
If you have an account at an IIROC-member dealer, you should have received information about CIPF coverage at the time of the account opening. You may also want to review the CIPF website. There are several links scattered throughout this post, but clicking here will take you to the home page. If you have any concerns, contact the investment advisor who manages your account.
What if I only have mutual funds?
Even if you are working with an IIROC-member investment dealer, your account may still consist only of mutual funds, despite the capacity of the account to hold individual, stocks, bonds or ETFs. However, some dealers belong to an association that only allows them to sell mutual funds. That association is known as the Mutual Fund Dealers Association (MFDA). They have separate protection against firm insolvency.
MFDA Investor Protection Corporation (MFDA IPC)
Much of what I wrote above for the CIPF applies to the MFDA IPC with respect to coverage. Three differences I observe are:
- Tax-Free Savings Accounts are not explicitly mentioned;
- Registered Education Savings Plans are not identified as a separately covered category but are instead included with other registered plans; and
- The MFDA is not a recognized organization in Quebec. Instead, the province has established the Autorité des marchés financiers (AMF – the Financial Markets Authority) and therefore has separate investor protection.
Since we are in the early part of tax season, my next post will consider some tax planning strategies available to Canadians.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.