Is “street name” the right choice for your investment account?

By default, almost all accounts (IRA, 401 (k), personal, etc.) are set up so that titles are held in “name of the street”. What does this mean for your investment account?

Here’s how the Securities and Exchange Commission explains the practice:

When you buy securities through a brokerage firm, most companies will automatically place your securities in the “name of the street”. This means that your brokerage firm will hold your securities in its name or that of another nominee and not in your name, but your firm will keep records showing you as the true or “beneficial owner”. You will not get a certificate, but will receive an account statement from your broker at least quarterly and annually showing your holdings.

Get the facts
Nothing is necessarily wrong with the name of the street. Over the past two decades this has become commonplace, but I still encourage you to read up on “Holding of your securities“direct from the SEC.” Direct “registration can protect your account if a broker or custodian becomes insolvent. Here’s how: In a bankruptcy scenario, the street name and direct registration accounts are split into two Some lawyers advise that securities held in direct registration can be transferred elsewhere more quickly. Surprisingly, securities held in the name of the street could potentially be used to cover the debts of other clients while taking longer to transfer.

What is so hard about mixing paper?
Aside from the street name and direct registration, physical certificates are the only other way to hold titles. Unfortunately, last year Charles Schwab (NYSE: SCHW) increased its price from $ 50 to $ 500 for transactions in physical stock certificates – a tenfold increase, just like that! Chuck says he just passes on the cost – but I don’t buy it. The United States is full of banks and brokerage houses. When processing millions of transactions on dozens and dozens of financial products, what is so difficult about dealing with stocks and physical bonds? Back then, paper was the only way, but now the practice is on the way out.

Physical securities slow down transactions, typically taking three to ten days. Because time is money, it seems the banks and brokerage houses would rather do away with the tradition altogether. However, I theorize that physically owning stocks and bonds, while not convenient for everyone, may have helped some investors not to sell low during the recent financial crisis – “You mean that I have to go to the bank and sit down with someone to sell ?! “

Slowing down the process prevents hair triggering decision making. Physical stocks and bonds may be easier to borrow (i.e. use as collateral). They are also used to help retail investors think long term.

Just try not to lose them.

A lost art form
(NYSE: DIS) is just one example of a public company that offered its shareholders the opportunity to hold beautiful share certificates worthy of an executive. But on October 16, 2013, Disney ended its long tradition.

How many parents will miss the opportunity to hang one of these colorful certificates on the wall of the nursery? For years, they have helped parents introduce their kids to investing. However, as a consolation prize, Disney will still be offering a Certificate of Acquisition for display purposes.

Bank of America (NYSE: BAC) also discontinued its paper share certificates this year.

These days, many employees at Charles Schwab, Bank of America, and similar institutions would have to dig up a dusty training manual if a customer was looking to sell an old paper certificate.

Wall Street prefers the “street name” – but you can’t
There are certain conveniences to holding shares in the name of the street for clients, such as electronic record keeping, quick transaction times, and funds available at settlement. However, direct listing offers most of the same amenities while increasing account protection (through transparency, as owners are listed directly on the issuer’s books) in case a broker or custodian runs into any issues. financial. Hopefully that will never happen, but if it does, do you really want to wait for the Securities Investor Protection Corporation to sort through a bunch of beneficial owners? If you hold street name titles, you may need to do so.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Source link