Protect Your Savings Accounts

For consumers, the line between a bank and a brokerage can be blurry. Unfortunately, not knowing the difference can put your savings at risk.

Larry Dallas of Three's Company is the prototypical used car salesman: Whether he's selling cars or prospecting for a date, he'll use any line that works. Larry's aggressive tactics are predictable enough to be harmless-but what if he was the guy you were listening to for investment recommendations?

Promising the moon

In reaction to gloomy economic news and predictions, U.S. consumers are reining in their spending. Recognizing the trend, brokerage firms are aggressively advertising high yields. Opportunistic savers are likely to be intrigued by the idea of earning 5 percent or more on their cash. The problem comes when these ads don't fully clarify that these brokerage accounts are not FDIC-insured.

Savers might be duped inadvertently by the close relationships between bank holding companies and brokerages. A deposit with Wells Fargo Bank, for example, is FDIC-insured, but a deposit with Wells Fargo Investments, LLC is not. Charles Schwab & Co., Inc. offers brokerage services, while Charles Schwab Bank provides deposit and lending services. What's in a name? A lot.

FDIC insurance-is it necessary?

If you think you don't need to keep those relationships straight, here's some food for thought: Your bank deposits of up to $100,000 are protected by the FDIC; if the bank goes out of business, the FDIC insurance guarantees that you don't lose a penny. Brokerage accounts don't have this same protection-your investment isn't guaranteed by anyone, and value losses, which are a real possibility, are yours to bear.

The Federal Trade Commission does have rules in place to help you differentiate between your insured and non-insured investment options. Unfortunately, the implementation of these rules doesn't clear things up entirely. In theory, brokerage ads and dealers aren't supposed to be misleading or untruthful. And brokerage sales materials must provide certain disclosures, such as those listed on the web page of Wells Fargo Investments, LLC, which clearly disclose that "investment products" are not FDIC-insured, are not bank-guaranteed, and may lose value. A similar statement appears on a web page for Schwab Bank High Yield Investor Checking. But just below that disclosure is an FDIC logo, which may leave you wondering if this checking account is an investment product or a bank deposit.

Cover your assets

To protect yourself, make sure that you ask some straightforward questions about where your money is going. Find out the exact name of the company issuing the deposit, and ask specifically if the investment is FDIC-insured. You can also visit the FDIC website, and research the deposit issuer on your own.

Investing your cash shouldn't be like buying a used car. Take the ads for what they are, and consider it a red flag if your investment advisor is similar in disposition to Larry Dallas.