CIPF Coverage: One Brokerage or Many?

Spreading out where you invest money, diversification, mitigates the risk of any single investment or group of investments blowing up and taking your portfolio with it. That is what makes broad market ETFs such a great way to invest. An asset allocation ETF even does that globally and rebalances to keep that risk in check.

But, what if the brokerage that you invest with goes bankrupt? Should you be using multiple brokerages to diversify where your investments are held? The Canadian Investor Protection Fund (CIPF) provides insurance for money invested via member firms.

Learn more about what CIPF covers and what it does not. Use that information to consider whether you should use multiple brokerages or consolidate your investments at one. I will also give my perspective on that.

Who’s Covered By CIPF?

The CIPF is meant to protect the investor. The investor/client is giving money to an investment firm to hold investments for them. The directors, partners, or shareholders of the investment company itself are not covered.

To have CIPF coverage for its clients, a brokerage or firm must be a CIPF member. This means that they are also regulated by the Canadian Investment Regulatory Organization (CIRO) and have to meet their standards. Brokerages and investment or mutual fund dealers that qualify will display this on their website. For example, above is a screenshot from Qtrade Direct Investing (what I use).

You can also use CIPF’s member directory. You may not always see the name of your advisor or brokerage that you recognize. Many have a parent firm that is the CIPF member. For example, Qtrade’s parent is Aviso Wealth Inc.

What’s Covered by CIPF

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You Own Your Assets

The CIPF provides protection if the member firm becomes insolvent and cannot account for all of the assets that it was holding for the client. When you invest through a brokerage like Qtrade, Questrade, Wealthsimple, or whatever brokerage your financial advisor is affiliated with – understand that they don’t own the investments. They are acting as custodians. For example, if you are investing using an all-in-one ETF like XEQT, VEQT, or ZEQT then you own your shares. Same with stocks, bonds, or non-proprietary mutual funds. It is not on the books of the brokerage as one of their assets to be liquidated for creditors in the event of bankruptcy.

So, it would be very unusual for investments to become unavailable for transfer. Sometimes a different brokerage will buy the accounts of the bankrupt one and the assets and accounts will simply move to the new brokerage. If not, you have to open accounts at a new brokerage and the assets would be transferred over. CIPF can help oversee that process if there are problems.

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CIPF Covers Unavailable or Missing Funds

It would be highly unusual for some of the assets held on your behalf not to be transferred to your new account. However, CIPF covers the difference if it does happen. For example, if I had $5MM worth of stocks at a brokerage that fails. Normally, those $5MM of stocks would transfer to my new account. However, let’s say that $500K worth is “missing”. That is where CIPF kicks in to cover that $500K. CIPF coverage is up to $1MM dollars per “account group” per person per member firm. So, it would take a massive mess-up to exceed the insurance. Even with a large portfolio.

The main way that your holdings could be unavailable or unaccounted for is through fraud or theft. That may not be from executives boarding a plane with a suitcase of cash, but from improper use of client money to fund trading bets placed by the firm – like MF Global did in 2011. In the Octagon Capital case of 2015, $6.1MM was loaned to a related company and not collected at bankruptcy. Still, that amount was well within the limits of CIPF coverage for the affected clients.

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Not Covered: Lent Securities

Another way that a security could be lost is if was lent out and the borrower went bankrupt. Brokerages will sometimes lend securities for a fee to investors or institutions. They borrow them for a variety of reasons such as shorting, market-making, or activism. You have to agree to allow that. It is usually pitched as an easy way to earn some extra money from your securities, but this is a risk. Something big would have to go wrong for a loss to materialize, but it is not zero. Some brokerages, like Wealthsimple, will provide their cash collateral for stocks being lent out so that you are still protected from that.

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Not Covered: Market Losses, Bad Advice, or Crypto

Whether you DIY invest or you have an advisor that manages your investments, CIPF is not there to cover losses from market activity. For example, if you buy a fund or stock and it performs poorly. That is not covered. That is the risk of investing. Similarly, if you invest in something that exceeds your risk tolerance causing you to emotionally sell it at a bad time, that is also on you. Even if you were following an advisor’s advice. Same if this type of trading is done on your behalf by a discretionary investment manager.

CIPF doesn’t cover you being sold a fraudulent or misrepresented investment. However, it would cover recover the share units (for whatever they are worth). For example, if I bought 1000 shares of Bre-X (a mining company that turned out to have fraudulent claims). CIPF would cover the recovery of the 1000 shares of Bre-X if my brokerage went belly up and they were missing. However, those shares would still be worthless and CIPF would not pay for my bad investment in buying them.

In summary, CIPF does not cover bad advice, misrepresentation of investment products, or poor investing practices. It just ensures that you get back what you bought. With the notable exception of cryptocurrencies. If your Etherium disappears into the ether, you are out of luck. If you want to pursue retribution for bad advice or practices, then a complaint to your advisor’s regulatory body is the route to use. For example, CIRO for the firm or the issuer of the credentials for an individual advisor.

CIPF Coverage Maximums

As described in the preceding section, multiple rare things must happen for CIPF insurance to be required. Foremost, a member firm must go bankrupt. That is rare, but it can happen. Second, some of the investments would have to be missing (extremely unusual). Finally, that portion of missing assets would have to exceed coverage for there to end up being a loss. The CIPF coverage maximum is one million dollars. However, that million is multiplied by different account owners and account-type groups. So, it can easily be several million for a household.

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Account Groups Covered

Retirement accounts, RESPs, and general accounts each have $1MM of coverage per person. So, up to $3MM of coverage is possible. That said, it would be highly unusual to have a $1MM RESP unless you have a massive family RESP or had a lottery-win type of return. This is illustrated in the chart below. Not shown in the chart is a spousal RRSP which would technically be owned and covered as part of the spouse’s pool of retirement accounts.

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Coverage Per Individual or Corporation

The coverage from CIPF for accounts at a given firm is per person. So, a household with two people could potentially double it. However, there are some important nuances.

For those with a corporation or holding company: if you are the only or controlling shareholder, then the corporate accounts are lumped in with your general personal accounts. If the corporation has multiple owners with no controlling interest, then it is a separate entity for coverage.

For example, a professional corporation with $1.5MM invested and the owner also has $500K invested personally would have $2MM in the general accounts pool. So, it would not all be covered. Is that a reason to worry? Probably not. Recall that the assets are still owned by them and it would be bizarre for all $2MM of the stocks or funds to go missing, even if the brokerage fails. Even if half were unrecovered (totally wild), that would still be covered by the $1MM of CIPF. You’d need multiple rare and bizarre catastrophic events to exceed that.

If two individuals have joint ownership of an account, then the amount is split evenly between them unless there is written evidence of a different proportional interest. For example, if a couple has a $1.5MM joint investment account, then $750K is part of each person’s pool of general accounts. This is also different from CDIC deposit insurance which treats joint accounts like a separate (third) person from the two individuals.

Multiple Brokerages for CIPF Coverage?

I wrote today’s post because people occasionally ask me whether they should hold their investments at multiple brokerages to spread out the risk of one of them failing. With CIPF coverage, it would take multiple rare things to stack up, and in a massive way for coverage to be exceeded.

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Double Whammy Required: Insolvent Firm Plus Missing Money

While small investment brokerages occasionally become insolvent, it would be unusual for that to happen to one of the main players. They are regulated and well-run companies. Even if that did happen, you still own the assets. Importantly, this is different from investing in private equity or hedge funds when the company is the investment. You give them money, but they also decide how to deploy it.

Even with a brokerage as custodian, it is not inconceivable that some of the assets could be missing. However, it would be unusual. The main causes would be lending to another entity that also goes bankrupt or inappropriate mingling of client and firm funds. Fraud would be required to hide that from regulators.

If there were a major brokerage failure, that would likely be a sign of systemic risk across brokerages. Using multiple brokerages may not help. That could happen with a cluster of bad events. If that were to happen, we may well face bigger problems with that level of financial chaos. Still, even if some of your funds were unavailable, there is CIPF coverage.

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Lots of coverage & unlikely that all the money disappears.

Even though CIPF coverage is $1MM, that can really be $2-3MM if you have different account types. Double that for a household. Plus, it is important to remember that it is the “lost assets” and not the account value that matters for CIPF. For example, if a firm with a billion dollars of assets under management is missing $6MM (like what happened with Octagon Capital), it is not likely that the $6 million was all from your accounts. Proportionally, the missing funds are <1% of the AUM. More likely, only a small sliver of your account value would be impacted. Even if you had $10MM invested in one account group, 10% of the holdings would need to go missing to exceed CIPF coverage.

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My Opinion On Multiple Brokerages For Full CIPF Coverage

Maximizing CIPF coverage by spreading your money out amongst multiple brokerages is not something to worry about from a loss perspective. Multiple layers of low-probability events would have to line up. Even more unlikely with ETF investing. Personally, the risk of me making a mistake juggling different accounts is higher. Plus, the time and hassle of doing so is a certainty. Someone more concerned about massive financial system failure may disagree with me. That’s fine, we can chat about it when I see you at the guns and ammo store. Regardless, it is not even an issue for investors without millions invested.

If I were considering whether to use one brokerage or many, it is more a question of the costs, risks, and benefits beyond CIPF coverage. I will dive into those in my next post.