Brokerage accounts allow investment brokers to manage the association's funds for a fee. using a brokerage firm can have several advantages:
- Some brokerage firms have a large inventory of CDs from banks across the country. This saves boards from going from bank to bank, shopping rates and filling out bank signature cards. The brokerage firm acts as a custodian of the funds so associations can hold several million dollars’ worth of CDs in a single account while keeping everything within the $250,000 FDIC limit.
- They provide more competitive yields than would be available through local banks.
- Brokerage firm financial advisers with experience with community associations provide investment continuity from board to board.
Avoid Risky Investments. Generally, account managers like to invest their clients' monies in stocks, bonds, and mutual funds--all of which should be avoided by boards because of the risk. If boards were to restrict brokerage firm investments to CDs, T-bills, and Ginnie Mae securities, then the associations monies are considered secure. The downside to brokerage accounts are (i) the payment of commissions to the brokerage firm to manage the account, and (ii) its limited protections against loss by the SIPC.
Insolvent Brokers. The Securities Investor Protection Corporation (SIPC) was created in 1970 as a non-profit, non-government, membership corporation, funded by member broker-dealers. The SIPC does not protect against market risk. Its primary role is to return funds to investors if the broker-dealer holding these assets becomes insolvent. See SIPC website.
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