We’ve kept all of our cash and investment accounts at one major bank for years. It makes life easier. But now that our balances are larger, I’ve started to wonder about whether we should diversify across institutions. Is there any risk there?
When you’re looking at protection of accounts, really you’re looking at two different things: FDIC insurance and SIPC insurance.
There’s no question that putting everything at one bank is convenient. Transfers are easy, you only have one login, one statement, and one number to call. Banks know this, and they want you to consolidate—it’s good business for them. The problem is that convenience can sometimes mask risk.
So what are the risks? After a certain level of wealth, you do have to start worrying about solvency. That’s where FDIC insurance comes in.
FDIC and the Bank Run Problem
When banks advertise “FDIC insured up to $250,000,” what they’re really protecting against is the old-fashioned bank run. Think back to Mary Poppins when everyone lines up at the bank demanding their money back.
Banks don’t actually keep all deposits sitting in a vault. They lend it out—for mortgages, car loans, business lines of credit. If too many depositors demand their money at once, the bank can’t meet those requests. FDIC insurance was created to stop the panic. It guarantees that at least $250,000 of deposits per account type, per bank, are protected if the bank fails.
That’s important—but it only applies to deposit accounts like checking and savings.
What About Investment Accounts?
Your brokerage accounts fall under SIPC, which covers up to $500,000. But it’s worth understanding what that really means.
If you own 100 shares of Apple at Vanguard and Vanguard goes under, you still own those shares. They don’t disappear. Another custodian will take over and transfer your assets. SIPC protection mainly comes into play if there’s fraud or if records are lost. It doesn’t insure against market losses.
So Should You Spread Out Accounts?
That brings us back to your question—do you keep everything in one place or spread it out?
Once balances are larger, I think it makes sense to diversify custodians. Not because your investments will vanish, but because service disruptions happen. Imagine your bank’s website goes down, or there’s a security breach, and all your cash is tied up there. Suddenly you have no liquidity.
A practical approach is to split different account types across institutions—for example, hold your brokerage at one institution and your retirement accounts at another. That way if one custodian has an issue, you still have another source of funds available.
The Trade-Off: Convenience vs. Resilience
At the end of the day, consolidating everything at one bank is easy. But true resilience often means giving up a little convenience. A second banking relationship, even if it feels redundant, provides insurance against the rare but very real risks of system outages or bank troubles.
For more perspective on account protection and diversification, listen to the full podcast episode here.