Segregated funds are a safeguard meant to help protect you against potential risks and problems. The idea here is that you are keeping client money separate from the brokerage’s own operating funds. That means it’s much safer since it lowers the risks that any customer assets get used by the company for various business expenses. It removes the issues that could appear in the case of financial difficulty, and that’s something you have to think of.
How do segregated funds work?
These segregated funds are meant to protect the trader, as we mentioned. When you deposit money on the brokerage account, these funds won’t be used as part of the operating cash for the brokerage. Instead, they deposit the money into a client account. The brokerage will continue to manage your account and they execute trades, but the funds will always be identified as a client asset, instead of a company asset. And that is important, because it clearly defines how the funds are being used.
Protecting client assets
Most top trading platforms offer this type of service, and it’s for a very good reason. It helps protect the assets of a client, and that way the company knows how much funds it has as well. It offers better financial clarity, which in turn makes it easier for the company to make the right decisions. That alone can prove to be a game changer, so you have to keep it in mind.
Reducing financial risks
Businesses will always face all kinds of financial challenges. If the client assets are segregated, then they are easier to identify. And you don’t have to worry that they will be used to cover business expenses. Some companies might try to do that, but for the most part, businesses will try to avoid that, and it works quite well in their situation.
Supporting the regulatory compliance
The important thing to keep in mind is that most financial regulators are requiring a licensed brokerage in order to keep the segregated client accounts. These requirements will help promote financial transparency, accurate record keeping, better internal controls and you can get independent oversight as well. Any failure to comply with these organizations can lead to all kinds of regulatory action. So it is a very serious thing, and you have to understand it.
Building investor confidence
Every brokerage needs to earn people’s trust in order for them to work with the company. And segregated funds are indeed a way for them to do that. It shows the company cares about the client and they are looking to safeguard their investment, which is a major part of the process.
These segregated funds belong to the clients, they are used for customer accounts, they are held in designated client accounts, can be subject to regulatory requirements and can be intended to protect investors. While on the other hand, company operating funds belong to the brokerage, they are used for the daily operations, can be held in the business accounts and support daily activities.
What does segregation protect the company against?
These segregated funds are offering good protection, but they do have some limits. They can protect client assets from being mixed with the operating funds of the brokerage. It can be a great thing, because you do want these funds to be separated, and it certainly helps to have such a separation in the first place.
However, that doesn’t mean segregated funds will protect against anything. Investors won’t be protected against changes in the asset prices, poor investment decisions they made, investment risks, market losses and so on. What you need to realize here is that investing will always have its fair share of risks. It is not risk-free, so you have to invest with this being taken into consideration. Addressing that can indeed be a major upside, especially if you learn more about how segregated funds work.
Why do regulators require segregated funds these days?
Clearly, regulators are focused on protecting clients as much as possible. And having a distinction between the client and business money makes a lot of sense. These segregated funds are required to protect investors and to improve the financial accountability of that company. It also helps with reducing the operational risks and it can encourage accurate accounting, not to mention it can increase confidence in the financial markets as well.
As an investor, you do want to perform your due diligence as much as possible. That means checking if the brokerage is regulated, if they explain where and how the funds are held, if there are protection measures for the investments and so on. Plus, they should have a good customer support experience as well. Some due diligence is going a long way, especially if you know how to approach this in a professional manner.
Other signs that the brokerage is trustworthy
You always want to look for signs that the brokerage can be trusted. And there are always some great signs, as you can see above. Aside from being regulated, the brokerage should also have transparent fee disclosures, strong cyber security measures, multi factor authentication, responsive customer support, clear risk disclosures, educational resources and also some reliable trading tools. The more protection and systems designed to help the client, the better it will be in the end. You always want to approach this from a professional standpoint, as that will only help make things better in the end.
Conclusion
We always recommend the idea of using a platform that has segregated funds. And that matters, because having segregated funds is going to protect you against possible financial issues for the brokerage. They can’t access those funds, which limits your potential losses. That being said, there are still limits to these funds. You can’t expect them to cover your investing mistakes or anything like that. Instead, they are just a distinction between the client funds and brokerage funds. But that’s it. Other than that, you can expect segregated funds to not really affect your day to day investing!
