How Safe Is Your Money

Companies go out of business all the time. It happens. And when we are about to entrust our life saving to a financial company, we may want to ask ourselves an important question. What happens to our money if they go out of business?

Before we can answer that directly, here’s an important bit of background. In Canada, there are two major categories of financial institutions: the advisers and the dealers.

The adviser type of company can only give you advice on what to do with your money and execute that advice. Even those that you give discretionary access are very limited in what they can do with your money and have to abide by a great deal of rules.

The dealer type of companies hold your money in trust and ensure that the value of the account matches the assets held. They are accountable for that money to the institution or a government body that governs or regulates them.

My goal here is quite simple: what happens to your money, if institution you work with goes bankrupt.

The subject matter, however, is not all that easily simplified.

The complexity comes from the three pillars of the financial system:

  • Banks
  • Securities Dealers
  • Insurance Companies

There are also three entities that protect us from insolvency of financial institutions:

It would be really simple if the financial companies (bank, dealer or insurance) stuck to their original product specialty and did not dabble in the products that the other two were offering.

But that didn’t happen. What protection does your financial institution have for your deposits, investments and insurance?

So the short of it is as follows.

CDIC covers things that are meant to be offered by the bank, such as cash deposits in savings and chequing accounts, GICs and term deposits less than 5 years, various cash substitutes such as money orders, certified cheques, traveller’s cheques and bank drafts issued by the member institutions. They group your accounts into like products (all cash deposits, all GIC’s, all cash substitutes) and then distribute them into these categories and cover you up to $100,000 per qualified account/account group.

CIPF covers your stocks, bonds, mutual funds, ETFs and other investments that are in accounts for various purposes, up to $1,000,000 per reason for saving.

  • For retirement (RRSPs and RRIFs)
  • For estate (Testamentary Trusts)
  • For your heirs (Living Trusts)
  • Personal Holding Companies
  • Etc. (For a complete list, please visit their site)

Assuris covers very similar accounts and holdings, but is limited to those issued by insurance companies. Assuris’ coverage is a little more complex but it is comparable.

How likely is it that a financial institution will become insolvent? Well, it’s not happening daily, but it has happened in the past.

CIPF and Assuris keep a list of their member insolvencies online, but CDIC keeps this information a little harder to get at. Wikipedia list seems to be sufficient for illustrative purposes.

So, is it possible for your savings account not to be insured if a financial institution fails? Absolutely! However, it is easy to make sure that it is covered. Talk to your WealthBar advisor and ask them if your accounts are optimized for coverage and what risks are you taking. We are always here to help.