The One Risk Nobody Talks About

Summary

The 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

• 💰 The Eurozone bank deposit guarantee is €100,000 per depositor, providing a safety net for depositors in case a bank fails.
• 📉 The investor compensation scheme in most EU countries offers a significantly lower protection of just €20,000, which hasn't been adjusted for inflation since 1997.
• 💡 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.
• 🇪🇺 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.
• 🏦 Bank runs can lead to financial institutions' failure, as seen with Silicon Valley Bank in 2023, emphasizing the importance of deposit guarantees.
• 🌐 Selecting brokers monitored by strict regulators, such as those based in Germany, can provide additional investor security.
• 💼 Brokers with strong financials, like having over $14 billion in equity capital, offer extra protection beyond the default compensation limits.
• 🔄 The ability to transfer shares to another broker without cost is a valuable feature for maintaining control and flexibility over one's investments.
• 📈 Diversifying investments across multiple brokerage accounts can be a prudent strategy, especially for larger investment portfolios.
• 📊 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 €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 €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

00:00

💰 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 €100,000 per depositor and the significantly lower investor compensation of €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.

05:02

🏦 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.

10:03

🚨 The Limitations of Investor Compensation Schemes

The final paragraph addresses the limitations of the investor compensation schemes in Europe, emphasizing the inadequacy of the €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.

Keywords

💡Investor Compensation

Investor Compensation refers to the reimbursement provided to investors in the event a broker commits fraud or mismanages their shares. In the European context, this compensation is alarmingly low, capped at €20,000 in most EU countries, which is significantly less than the FDIC insurance coverage in the US. This term is central to the video's theme as it highlights a critical issue in European financial protection for investors.

💡Deposit Guarantee

A Deposit Guarantee is a form of insurance that protects depositors' funds in the event a bank fails and cannot return their money. In the Eurozone, the deposit guarantee is €100,000 per depositor, which is a straightforward and important protection for individuals who deposit money in banks. This concept is essential in the video as it sets the stage for comparing the financial protections available for bank deposits versus investments.

💡Regulated Brokers

Regulated Brokers are financial institutions that are overseen by regulatory bodies to ensure they adhere to industry standards and protect their clients' interests. In the context of the video, using regulated brokers is crucial for investors as it provides a level of protection and security for their investments, despite the low compensation limits in place.

💡Asset Segregation

Asset Segregation is the practice of keeping a client's investment assets separate from the broker's own assets. This is important for protecting investors in the event of a broker's bankruptcy, as the client's assets cannot be touched and are transferred to another brokerage account. The concept is central to the video's message, emphasizing the importance of proper asset management and regulatory oversight.

💡Bank Run

A Bank Run occurs when a large number of customers try to withdraw their money from a bank simultaneously, fearing the bank's insolvency. This can lead to the bank's collapse due to an inability to meet the sudden demand for cash. The term is relevant in the video as it illustrates the risks associated with banks and the importance of deposit guarantees.

💡Share Lending

Share Lending is a practice where brokers lend out shares to other parties, typically for short selling, and receive collateral in return. While this generates additional income, it introduces counterparty risk, as there's a chance both the broker and the borrower could go bankrupt simultaneously. The concept is discussed in the video to caution investors about the potential risks associated with certain investment practices.

💡Financial Strength

Financial Strength refers to the robustness of a financial institution's balance sheet, its profitability, and its ability to meet obligations and absorb losses. In the video, the speaker emphasizes the importance of choosing brokers with strong financials as an additional layer of protection for investors' assets.

💡Custodian Bank

A Custodian Bank is a financial institution that holds and safeguards assets on behalf of its clients, providing asset servicing and administration. In the context of the video, the custodian bank's role is crucial for ensuring the safety and proper management of investors' securities.

💡Investment Diversification

Investment Diversification is a strategy that involves spreading investments across a variety of assets, sectors, or financial instruments to reduce risk. The video advocates for diversification not only across different investments but also across multiple brokerage accounts to mitigate potential losses.

💡Early Retirement

Early Retirement refers to the act of leaving the workforce and stopping active employment before the typical retirement age. The video's speakers are working towards this goal and use ETFs as the main strategy for their investment portfolio, which underscores the importance of having strong investor protections for long-term financial planning.

💡Financial Regulation

Financial Regulation refers to the rules and oversight imposed by governmental agencies to监督 and control the operation of financial institutions. In the video, the speaker underscores the importance of choosing brokers that are subject to strict financial regulation, as this provides greater security and protection for investors' assets.

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 €100,000 per depositor, a straightforward protection mechanism.

In contrast, the investor compensation scheme in most EU countries reimburses a maximum of €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 €20,000 investor compensation in most European countries has not been adjusted for inflation since 1997.

Proposals to increase the protection limit to €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 € 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

€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 €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 €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 € 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 €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 € 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 €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

€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 €20,000 hasn't

once been adjusted for inflation since

1997 which would at the very least raise

it to €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 €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