The One Risk Nobody Talks About
Summary
TLDRThe video discusses the inadequacy of European investor compensation schemes compared to the robust protection offered by US financial institutions. It emphasizes the importance of choosing reputable, strictly regulated brokers to mitigate risks and suggests diversifying investments across multiple brokerage accounts for added security. The speaker expresses concern over the low compensation limits and calls for increased awareness and potential changes to the current system.
Takeaways
- π° The Eurozone bank deposit guarantee is β¬100,000 per depositor, providing a safety net for depositors in case a bank fails.
- π The investor compensation scheme in most EU countries offers a significantly lower protection of just β¬20,000, which hasn't been adjusted for inflation since 1997.
- π‘ Despite the low compensation limit, choosing a well-regulated broker can mitigate risks, as client assets are typically segregated and thus protected in the event of broker bankruptcy.
- πͺπΊ The US offers much stronger investor protection with SIPC insurance covering up to $500,000 per investor, highlighting a substantial disparity in protection standards between the EU and the US.
- π¦ Bank runs can lead to financial institutions' failure, as seen with Silicon Valley Bank in 2023, emphasizing the importance of deposit guarantees.
- π Selecting brokers monitored by strict regulators, such as those based in Germany, can provide additional investor security.
- πΌ Brokers with strong financials, like having over $14 billion in equity capital, offer extra protection beyond the default compensation limits.
- π The ability to transfer shares to another broker without cost is a valuable feature for maintaining control and flexibility over one's investments.
- π Diversifying investments across multiple brokerage accounts can be a prudent strategy, especially for larger investment portfolios.
- π While the current EU compensation limits are a concern, using reputable and regulated brokers can minimize the likelihood of needing to rely on such schemes.
Q & A
What is the maximum amount covered under the bank deposit guarantee in the Euro zone?
-The maximum amount covered under the bank deposit guarantee in the Euro zone is β¬100,000 per depositor.
What is the primary purpose of the investor compensation scheme in Europe?
-The primary purpose of the investor compensation scheme in Europe is to provide reimbursement to investors in case a broker commits fraud or loses their shares.
How much protection does the average EU country offer its investors under the investor compensation scheme?
-The average EU country offers β¬20,000 in protection per investor under the investor compensation scheme.
How does the US compare to the EU in terms of investor protection for shares?
-In the US, the SIPC insurance protects investors up to $500,000 per investor, which includes cash in a brokerage account up to $250,000. This is significantly higher than the protection offered in most EU countries.
What is the main difference between bank deposits and investing in securities like ETFs or stocks through regulated brokers?
-The main difference is that when investing in securities through regulated brokers, the investor retains full ownership of their shares, and the assets are segregated from the broker's own assets, meaning they cannot be touched in case of the broker's bankruptcy.
What are some factors to consider when choosing a broker for investing?
-Factors to consider when choosing a broker include the broker's regulatory oversight, financial strength, profitability, credit rating, and whether the broker is based in a country with strict regulations and a good track record in investor protection.
How does Interactive Brokers stand out in terms of investor protection?
-Interactive Brokers stands out with over $14 billion in equity capital, a highly profitable business, a good credit rating, and additional insights into its financials due to being a publicly listed company in the US. It also provides daily internal reviews and annual external audits of client assets.
What is Trade Republic's position in the European brokerage market?
-Trade Republic is Europe's largest broker with over 4 million customers and 35 billion in assets under management. It is backed by major investment firms and has received its own full banking license, adding an additional layer of trust.
What happens to an investor's shares in case of a broker's bankruptcy?
-In case of a broker's bankruptcy, the investor's shares should be transferred to another brokerage account since the shares are the investor's property and were never actually owned by the broker.
Why is it important for investors to diversify their investments across multiple brokerage accounts?
-Diversifying investments across multiple brokerage accounts can reduce risk and provide peace of mind, especially when the investments reach a significant size. It ensures that the investor's assets are protected even if one broker faces financial difficulties.
What is the recommended approach for investors regarding the investor compensation scheme and their choice of brokers?
-Investors should choose reputable, strictly regulated brokers to minimize the risk of needing to rely on the investor compensation scheme. They should also consider diversifying their investments across multiple brokerage accounts as their portfolio grows to further mitigate potential risks.
Outlines
π° Investor Compensation and Deposit Guarantee Schemes in Europe
This paragraph discusses the European investor compensation and deposit guarantee schemes, emphasizing their importance as a last line of defense for depositors and investors. It highlights the disparity between the Euro zone's bank deposit guarantee of β¬100,000 per depositor and the significantly lower investor compensation of β¬20,000 in most EU countries. The speaker expresses concern over this difference, especially when compared to the more robust protections offered in the United States, such as the FDIC Deposit Insurance and SIPC insurance. The paragraph also introduces the topic of the video, which is to shed light on this uncomfortable subject and explore ways to minimize the associated risks.
π¦ Understanding the Protection Offered by Regulated Brokers
The second paragraph delves into the protections offered by well-regulated brokers in Europe. It explains that when investing through brokers like Interactive Brokers or Trade Republic, investors retain full ownership of their shares, which are segregated from the broker's assets. This means that investments are safe even in the event of the broker's bankruptcy. The speaker also discusses the role of strict regulators and the financial health of the broker as additional layers of protection. Mention is made of brokers with strong equity capital and daily internal and annual external audits for client assets. The paragraph also touches on the handling of shares through major custodian banks like HSBC.
π¨ The Limitations of Investor Compensation Schemes
The final paragraph addresses the limitations of the investor compensation schemes in Europe, emphasizing the inadequacy of the β¬20,000 compensation cap, especially considering it hasn't been adjusted for inflation since 1997. The speaker expresses frustration with the EU's approach to investor protection and compares it unfavorably to the U.S. system. The paragraph also provides advice on selecting reputable brokers and diversifying investments across multiple brokerage accounts to mitigate risk. The speaker shares their personal strategy of spreading investments across different brokers and emphasizes the importance of choosing brokers that do not lend out shares by default to maintain asset segregation.
Mindmap
Keywords
π‘Investor Compensation
π‘Deposit Guarantee
π‘Regulated Brokers
π‘Asset Segregation
π‘Bank Run
π‘Share Lending
π‘Financial Strength
π‘Custodian Bank
π‘Investment Diversification
π‘Early Retirement
π‘Financial Regulation
Highlights
The discussion focuses on investor compensation and deposit guarantee schemes in Europe, which serve as the last line of defense for depositors and investors when a financial institution fails.
The deposit guarantee for banks in the Euro zone is β¬100,000 per depositor, a straightforward protection mechanism.
In contrast, the investor compensation scheme in most EU countries reimburses a maximum of β¬20,000, which is significantly lower than the US-based financial institutions' protections.
Regulated brokers hold assets strictly segregated, meaning that investors retain full ownership and these assets are protected even in the event of the broker's bankruptcy.
Share lending involves some counterparty risk, especially if both the broker and borrower were to go bankrupt simultaneously.
Choosing brokers monitored by strict regulators provides an additional layer of safety for investors' assets.
Brokers with strong financial backing, like having over $14 billion in equity capital, offer more security for clients' investments.
Some investments can be protected up to $500,000 via the US SIPC insurance if they're custody with a broker's US affiliate.
The β¬20,000 investor compensation in most European countries has not been adjusted for inflation since 1997.
Proposals to increase the protection limit to β¬50,000 in 2010 were withdrawn in 2015 due to lack of EU-level endorsement.
The difference in investor protection between the US and EU highlights a disparity in how investors are treated and protected.
It is advised to select reputable, strictly regulated brokers to minimize the risk of needing to rely on investor compensation schemes.
Avoiding brokers that lend out shares by default can help maintain asset segregation and reduce counterparty risk.
The presenter suggests that having multiple brokerage accounts can provide additional peace of mind as investments grow.
Diversifying investments across different brokerage accounts is a strategy to mitigate potential risks associated with a single broker.
The video aims to raise awareness about the inadequacies in European investor protections and encourages discussion on the topic.
Despite the concerns raised, the presenter encourages viewers not to be discouraged from investing and to reach their financial goals.
The presenter shares personal strategies for managing investments, including spreading assets across multiple brokers and focusing on those with strong financial backing.
Transcripts
we need to talk about one of my least
favorite topics today investor
compensation and deposit guarantee
schemes in Europe something you need to
be aware of these are meant as the last
line of defense for depositors and
investors when a financial institution
for example bank or a broker fails and
is unable to return our money or even
worse our shares in stocks or ETFs and
while the deposit guarantee for banks in
the Euro zone is pretty straightforward
at β¬ 100,000 per depositor the investor
compensation scheme meaning the amount
that's reimbursed if a broker were to
commit fraud or otherwise lose your
shares is ridiculously low at only
β¬20,000 in most EU countries now since
your assets at regulated Brokers are
strictly segregated and simply held for
you you only need this protection if
there is fraud involved and your shares
were mismanaged or never purchased in
the first place but even still β¬20,000
is just insanely little protection
against this nightmare scenario this is
especially shocking when compared to
us-based Financial in institions where
banks have a $250,000 FDIC Deposit
Insurance two and a half times what we
have and your Shares are sipc insured up
to $500,000 per investor which includes
cash on a brokerage account up to 250k
this means the US investor protection is
25x the protection in most EU countries
which is just crazy to think about how
can anyone possibly justify a massive
difference like this as you can see this
is a very uncomfortable topic to discuss
and look into which is probably why you
don't see a single European Finance
YouTuber ever talk about it but we're
going to do that today because it's
important and shouldn't just be swept
under the rug this video is not meant to
alarm you or to stop you from investing
to reach your financial goals I'm just
hoping to shed a bit of light on this
topic and to discuss some options to
minimize this risk as much as possible
who knows if enough of us complain we
might even be able to see some positive
changes in the coming years before we
get right into it gently tap the like
button so we can increase the number of
people who reach with this information
and if you'd like to support me feel
free to use my links in description
below to what I consider to be the best
and safest lowcost brokers in Europe
I'll of course tell you my reasoning for
that later on as well so let's take a
step back and talk about the deposit
guarantee first when you deposit money
at a bank in the Euro Zone your money is
protected up to β¬100,000 by the bank
deposit guarantee in that country the
bank itself is legally allowed to land
out or otherwise invest your funds while
they're sitting there and to generate
income from them as long as certain
reserve requirements are met since this
is not risk-free Banks can default on
their obligations to their depositors a
bank run which occurs when a large
portion of its customers want to
withdraw money at the same time can also
drive a bank into bankruptcy very
quickly just look at what happened in
2023 to Silicon Valley Bank in the US
and credit Swiss in Switzerland as a
result the bank deposit guarantee
protecting up to β¬ 100,000 per depositor
is very important okay but now let's get
to today's main topic investor
compensation schemes in Europe first and
most most importantly when you're
investing into ETFs stocks or other
Securities using well-known strictly
regulated Brokers like interactive
brokers or trade Republic my two
personal favorites your shares
exclusively belong to you that's because
a broker is simply acting as an
intermediary on your behalf but you
retain full ownership of your shares
since your assets are segregated from
the broker itself this means your
Investments cannot be touched in case of
bankruptcy and would simply be
transferred over to another brokerage
account of yours no matter if we're
talking about 20,000 100,000 a million
or more this is the major difference
compared to bank deposits one risk work
mentioning in this context is when share
lending is involved for example with the
two Brokers deiro and trading 212 even
though your Shares are lend out against
collateral there's still some
counterparty risk in case both the
broker and the borrower were to go
bankrupt at the exact same time now
since you want to ensure that your
assets are properly segregated and
recorded with you as the beneficial
owner at all times I would also
prioritize Brokers that are monitored by
strict Regulators for example I
personally feel safer holding my
long-term Investments on a broker that's
based and regulated in Germany by the
buffin compared to one that's based in
Bulgaria and regulated in Cyprus by the
cisc for example which mostly handles
Brokers that deal with cfds and leverage
just to be clear I have nothing against
Bulgaria and Cypress I love both of
those countries their regulatory
Authority simply wouldn't be my first
choice when it comes to ensuring the
safety of hundreds of thousands of euros
worth of my investments for decades next
your broker's finances provide you with
an additional layer of protection in
addition to asset segregation this is
where inct with Brokers stands out with
over $14 billion in equity Capital 10
billion more than it needs according to
regulations a highly profitable business
a good credit rating by standard and
pors and additional insights into its
financials due to it being a publicly
listed company in the US not only that
all client assets which are held in SE
gated accounts are reviewed every single
day internally to make sure all records
match and additionally once a year by an
external independent auditor and apart
from the default β¬20,000 investor
compensation in Ireland some Investments
are actually protected up to $500,000
via the US sipc insurance if they're
custody with its us affiliate iblc sadly
I wasn't able to easily find out what
this applies to but I could imagine this
relates to US stocks for example which I
know many of you hold as well meanwhile
trade Republic my personal number two
broker which I also use to earn 4%
interest per year on my cash Reserve
secured by a β¬ 100,000 bank deposit
guarantee has now become profitable as
well after a strong focus on growth over
the past 5 years which turned it into
Europe's largest broker with over 4
million customers and 35 billion in
assets under management since trade
Republic is backed by some major
investment firms like seoa capital and
Peter Teal's Founders fund and has large
Equity reserves I have zero worries
about its future or my investments here
either the fact that they've now
received their own full banking license
something very few other Brokers have
adds an additional layer of trust as
well ETFs stocks or other Securities you
hold on trade Republic are handled by
HSBC the largest custodian Bank in
Europe with over β¬2.6 trillion in assets
and remain your property at all times as
they're Never Land out which is also
where you can transfer your shares in or
out anytime for free if you ever change
your mind on the broker you want to use
you can do the same with interactive
brokers by the way something I did in a
previous video which I'll link right
here even still let's assume every
safety mechanism so far fails for
example in the case of fraud if your
shares were never purchased in the first
place or otherwise mismanaged this is
pretty much impossible with well
regulated Brokers since there strict
internal processes for handling and
reviewing customer assets on a regular
often times daily basis and a constant
exchange with Regulators to verify that
all assets are custody correctly in the
correct amounts even still for now let's
assume the worst your assets can't be
found or at least some of them are
missing and to make things worse the
broker does not have the capital to
reimburse you for missing shares meaning
the second layer of protection the
broker's own Capital failed as well this
extremely unlikely scenario is the only
case where you have to rely on the
investor compensation scheme as your
last line of defense and here's the
shocking part even though it should
never be needed if you picked a
trustworthy strictly regulated broker
the investor compens compensation for
all of your shares is limited to only
β¬20,000 in most European countries yes
that's five times less than the 100K
bank deposit guarantee even though we
could be talking about people's entire
retirement funds here and compared to
the sipc insurance in the US which
protects investors up to $500,000 each
the difference of 25x just makes you
want to cry I don't know how else to put
this to make things worse the investor
compensation amount of β¬20,000 hasn't
once been adjusted for inflation since
1997 which would at the very least raise
it to β¬35,000 today there were some
proposals to update the protection limit
to 50,000 in 2010 which is still way too
low but the proposal was ultimately
withdrawn in 2015 as it wasn't endorsed
at the EU level in my opinion it makes
zero sense for this protection to be
lower than the bank deposit guarantee in
the first place in fact it should have
been higher instead just like in the US
that's because we're talking about
people's long-term Investments and
retirement accounts here this gives me
the impress that the EU and most of its
member states treat us investors as if
we were mindlessly speculating on risky
assets and are not worth protecting as a
result compared to the average Joe just
keeping everything in cash on their bank
account or spending it all every single
month as a good citizen should am I
right in my opinion this urgently needs
to change and this topic deserves to get
more attention maybe some of you can
help me with that by sharing this video
and gently tapping the like button okay
in all seriousness does this mean you
should be worried or should you open
additional brokage accounts whenever one
of them reaches 20,000 000 no of course
not that would be ridiculous just make
sure you pick a reputable strictly
regulated broker for example interactive
brokers or trade Republic and your risk
of losing any of your shares should be
as close to zero as possible even if
they were to ever declare bankruptcy if
possible I would avoid Brokers that land
out any of your shares by default since
that introduces some counterparty risk
and can mess with asset segregation
which is essential in the case of
bankruptcy so that you get all of your
shares back you should also pick an
option that allows you to transfer your
shares to another broker and any time so
that you're never loged in in case you
see some developments that you don't
like generally speaking I think there's
nothing wrong with adding a second or
even third Locos brokerage account once
your Investments reach a certain size
even if it's only to make you sleep a
bit better at night if I had to pick a
single broker to keep all of my
investments on it would definitely be
interactive brokers due to its long
history and financial strength but
luckily I don't have to stick to a
single one as a result the Investment
Portfolio I share with my wife which
recently crossed β¬300,000 is currently
spread out across a total of four broker
accounts the Austrian broker flatex
where we started our ETF investment
Journey back in 2017 trade Republic
which We additionally Ed to earn 4%
interest on our cash reserves scalable
capital and lastly interactive brokers
our largest account four is definitely
overkilled though so I wouldn't
recommend copying what we're doing it
just so happens that we accumulated a
few brokerage accounts over years which
luckily all come without account fees
I'm not planning on adding any more
though even if our Investment Portfolio
were to grow Beyond half a million EUR
or more so as you could probably tell
throughout the video I'm quite upset
about the situation and I wish it wasn't
something I need to talk or even think
about in the first place if we were in
the US we wouldn't have to waste any
time on this since all of our accounts
will be protected up to $500,000 each
while the 20,000 limit in most EU
countries is just a massive joke in
comparison since my wife and I are
getting closer and closer to reaching
our goal of being able to retire early
in a few years and ETFs are the main
pillar of our investment strategy this
is something that's on my mind from time
to time I really wish it wasn't and
hopefully this changes over the coming
years until then the best we can do is
to pick reputable strictly regulated
Brokers to reduce the risk of ever being
in a situation where we need to rely on
investor compensation schemes in the
first place and to diversify over two to
three different brokerage accounts as
our investments grow in size all right
guys this was a really rough topic to
talk about I hope I didn't take this too
far as I would hate for any of you to
now be discouraged from investing to
reach your financial goals I just wanted
to shed some light on an uncomfortable
topic that seems to never be openly
discussed anywhere hopefully we're able
to see some changes by making more
people aware of it before you take off
don't forget to jent type the like
button and to subscribe if you haven't
yet you can find the best local Brokers
for ETFs I mentioned in the description
below which is a great way to support me
if you'd like to thank you guys so much
for watching have a wonderful week and
until next time
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