Where is My Money? It’s Not So Easy to Answer Anymore

Over the last few days, I’ve been asked the above question three times in different forms. One of my firm’s clients emailed, “Is my money safe?” I know he didn’t mean his investments themselves, as he is a relatively aggressive investor. One of our reps asked about where exactly our securities and cash were “custodied.” And the question was asked most directly, in the form above, by my mother-in-law about an hour ago… “Where is my money?”

One of the things I’ve always envied about my friends who work in the building trades is that at the end of the day, they can step back and say, “I built that.” But for a lot of us, our work is much less tangible than that. What do we really do, after all? In the financial business, we talk on the phone, look at blips on a computer screen, and write things on paper and shuffle them around a lot. So the "where is my money?" question is not that easy to answer.

As I attempted to answer my three questioners, one of my questioners mentioned their “cash.” But he really meant his “cash balance.” This in itself is a misnomer, because the only true cash is really currency. Our bank balances, too, are just blips on a screen. Banks don’t have that much currency sitting around waiting for you to need it. They have it invested in mortgages and other investments. Probably the best and simplest description of this, and I know you’ve all seen it, is George Bailey’s appeal to the crowd during the run on the bank in “It’s a Wonderful Life.”

The ownership form of money and investments is surprisingly intangible. Hardly anybody has a stock certificate any more. Options, my specialty, have never been evidenced by “certificates.” Mutual funds don’t have certificates either, as far as I know (I’ve never seen one). Everything is electronic, as I say, either blips on a screen, or bits of ink on a monthly statement.

So how does ownership work in the world of securities, where, for the most part, there are no certificates any more? Your shares, bonds, options, or mutual funds are held at the Depository Trust Company (DTC), the central depository for the brokerage community. The main function of DTC is to clear and settle stock trades and to provide custody of securities in an automated environment. When a stock is bought, your brokerage account is debited for the amount of the purchase plus commission. You broker then “pays” DTC (their account is debited for the purchase price (without commission), and their account is correspondingly credited with the shares purchased. Your broker simultaneously credits the shares to your account. The sell side works similarly, with the shares being debited and cash credited down the line. Since each broker may have thousands of transactions in a day, their cash is netted down to one net debit or credit.

For the banks, their central depository is the Federal Reserve Bank, which processes checks and nets the transactions for each bank.

Every once in a while, I like to remind myself of all this “intangibleness”, lest I start taking all this money stuff too seriously. My ex-partner used to be fond of saying, “you never really know how you did until they probate your estate.” But don’t get me wrong, I’ll still take growing blips over shrinking blips any day. - Bob


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