The Rush to Buy Toilet Paper Has All the Hallmarks of a Bank Run

Ellen Corby and James Stewart in “It’s a Wonderful Life”

For those struggling to unglue themselves from the constant coverage of the novel coronavirus, or for anyone who has visited a grocery store lately, it would be difficult not to notice that a few key staples — including toilet paper — seem to be in short supply.

A recent Bloomberg article by Millie Munshi, Megan Durisin, and Corinne Gretler notes that — while there is plenty of food — the logistics systems used to deliver food throughout the country (and around the world) and the ability to get those products to shelves is strained under a sudden surge of customers stocking up on food and supplies.

It turns out that the problem isn’t supply — there is plenty of toilet paper in the world. The issue is the sudden surge in demand driven by the fear that, with everyone else rushing to buy toilet paper, there won’t be enough for all of us. This, in turn, drives people to buy more than they normally would out of concern for scarcity. In other words, the shortage of available supply isn’t driven by need, it’s driven by fear that others will get to the shelves first — a sort of self-fulfilling fear. President Franklin D. Roosevelt may have summed it up best when, in his first inaugural address, he said the “only thing we have to fear is fear itself.” Getting consumers to believe that there will be sufficient supply — even if we can’t be certain that there will be — should be sufficient to restore calm, which in turn would restore sufficient supply on store shelves.

This same underlying dynamic is what drives bank runs, perhaps visualized best by Frank Capra in “It’s a Wonderful Life.” Under the Fed’s Reserve requirements, banks are required to hold 10% of checking deposits in-branch, informed by probabalistic models that suggest that such cash reserves are sufficient to meet the needs of customers withdrawing funds on any given day. However, if customers become concerned that their neighbors will rush to the bank to withdraw funds, the desire to withdraw one’s own funds becomes more acute. Fear and panic become self-fulfilling.

The FDIC was instituted in the wake of the Great Depression to help address this concern. By backstopping deposits by the full faith and credit of the U.S. Government, depositors no longer needed to worry about whether there would be enough cash in the bank, as even in the unlikely event that a bank were to fail, customers would be fully repaid by the FDIC. The FDIC thus remains a crucial component driving the safety and stability of our banking sector.

There is a notable exception to the protections afforded by the FDIC: it is limited, currently capped at $250,000 per depositor, per account type, per bank charter. This means that if you hold accounts at a bank (checking, savings, CDs) that, in aggregate, exceed $250,000, you may not be fully protected and could suffer loss of principal in the event of bank failure.

There’s an easy way to protect yourself: spread cash across multiple account types (individual, joint) and multiple banks. Services like MaxMyInterest.com were designed to help you do just this, automatically monitoring your accounts and helping keep funds below the FDIC limit at each bank. With a market-leading rate of up to 1.71% APY, Max can also help you earn higher yields on your cash, automatically.

When fear grips markets — whether the market is for toilet paper or bank deposits — the perceived risk of scarcity can lead to a vicious cycle that creates the scarcity that is feared. During these challenging times, the better we’re able to promote rationality over fear, the better we’ll all manage through as a society.

Maximizing Yield in a Near-Zero Rate Environment

Image by Pexels from Pixabay

To some, the global financial crisis of 2008-2010 may seem a distant memory. But it was almost 11 years ago today that the crisis was at its peak, sending some of the largest banks in the country to the brink of insolvency, while others failed entirely. As lending dried up, the broader economy suffered, leading the S&P 500 Index to decline by more than 50%, a dramatic fall that shook the confidence of an entire generation of investors.

Banks that seemed rock-solid were failing, and the larger the bank, the more complex were its exposures and thus the more difficult it was to assess its safety. It was against this backdrop that I began managing my own cash more actively, in search of greater safety and liquidity.

The Role of the FDIC

In the wake of the Great Depression, President Franklin D. Roosevelt and Congress enacted the Banking Act of 1933, which paved the way for the creation of the Federal Deposit Insurance Corporation. The FDIC helped create a level playing field for banks, backstopping depositors with the full faith and credit of the U.S. Government. The FDIC thus conferred upon bank deposits the same credit risk as U.S. Treasurys — up to a cap — giving depositors confidence that their deposits were safe.  

During the Financial Crisis, the FDIC raised the deposit insurance limit to $250,000 per depositor, per account type, per bank charter, and it has remained at this level ever since. By spreading cash across multiple banks, depositors can avail themselves of even more FDIC insurance coverage, making it possible to keep even larger sums of cash fully insured. 

Maximizing Yield and Safety

At the time of the Financial Crisis, I was working as an investment banker at one of the largest banks in the country and witnessed first-hand the risks that depositors faced, particularly if they were holding more than the FDIC insurance limit in cash. I started looking for a way to keep my own cash safe and liquid. 

Brokerage firms were marketing brokered deposit solutions that they claimed increased deposit insurance coverage, but the deeper I dug into these products, the more flaws I found. I determined that these brokered deposit offerings — in which a bank or brokerage firm sells your deposits to other banks to earn a profit while claiming to offer increased FDIC coverage — all suffered from the same fundamental flaw: the funds all flowed through an intermediary institution, so if the institution selling brokered deposits were to fail, depositors might lose access to all their funds until that institution was bailed out. Put differently, these solutions — marketed as a means of reducing risk — were in fact riskiest in precisely the circumstances that they were designed to help you avoid.

I decided that the best way to keep cash safe was much simpler: keep it in my own bank accounts. I could hold these accounts directly in my own name and spread my cash across multiple banks so that even if one bank were to fail, I’d still have access to funds at other banks while the failing bank went through the FDIC resolution process. No brokers. No intermediaries. Just my own cash sitting in my own bank accounts.

The challenge, of course, was monitoring all of these accounts. I found myself logging into multiple bank accounts each month to monitor balances and rates. Accrued interest pushed me over the FDIC limit, and as time went on, I noticed that banks were changing their rates all the time, meaning that I found myself having to constantly monitor rates and shift funds from bank to bank to ensure I was getting the best deal. There had to be a better way.

My experience managing cash during the financial crisis led to the creation of MaxMyInterest, a simple cash management solution that fully automates this cash management strategy, enabling anyone to benefit from increased FDIC insurance coverage and higher yields. Max is now used by advisors at more than a thousand wealth management firms with collectively more than $1 trillion of assets under management. Clients using Max typically earn thousands to tens-of-thousands of dollars of incremental interest income each year, automatically. 

How Max Works

Max works by helping you link your existing brick-and-mortar checking account or brokerage account to your choice of higher-yielding online banks. Each bank is backed by FDIC insurance coverage. By spreading funds across multiple banks, you can increase liquidity and FDIC insurance coverage at the same time. And because online banks have lower operating costs, they tend to pay much higher rates than brick-and-mortar banks or brokerage firms, so you can earn higher returns on your cash at the same time.

Opening new bank accounts is now easier than ever. You can open as many accounts as you like, and unlike credit cards, there’s no impact to your credit rating when you open savings accounts. The Max platform makes it even easier, making it possible to open, link, and begin funding new savings accounts in as little as 60 seconds using Max’s patented Common Application. But even without Max, you can pursue this same strategy of opening and managing a portfolio of bank accounts on your own.

Max simply automates the process for you, monitoring interest rates daily. Each month, Max helps your funds flow whichever of your banks is offering the highest interest rates. So not only do you benefit from increased safety and liquidity, you can earn higher yield, too.

The Fed Funds Rate

When Max launched in 2014, the Fed Funds target rate was 0% to 0.25%. You can think of the Federal Reserve as a bank for banks, and so the Fed Funds rate is effectively the rate at which banks can borrow from (or lend funds to) the Fed overnight. Against that backdrop, the average rate paid on savings accounts across the country was a paltry 0.12%. Still, online banks — owing to their lower operating costs — were able to pay higher yield, approximately 0.90% at the time. As a result, depositors who were astute enough to open savings accounts at online banks could pick up an extra 80 basis points, or 0.80%, of risk-free incremental return, simply by being a bit smarter about where they were holding their cash. 

Beginning in December 2016, the Fed began raising rates in earnest. Online banks raised their rates, too, reaching a peak of 2.25%. The banks supported on the Max platform raised their rates even higher, since Max saves them from having to spend money on advertising or customer acquisition. As a result, the top rate earned by Max members reached 2.72%, a rate that enabled customers to earn more on cash than they might pay on a 7/1 adjustable-rate mortgage!

As the Fed has begun to cut rates, the rates paid by online banks also began to decline, but at a slower pace than the Fed rate cuts. Bankers call the relationship between the change in interest rates paid by banks and the Fed Funds rate the deposit beta. At lower interest rates, online bank deposit betas have tended to average around 0.6, which means that for every 100 bps change in the Fed Funds rate, banks only adjust their rates by 60 bps.

At Max, our data suggest that if the Fed were to lower its target range to 0% to 0.25% (as it was following the Financial Crisis), the online banks will still pay approximately 0.80% to 1.00% on savings accounts. So while interest rates may not be as high as they were in 2019 when the economy was booming, savvy depositors can still earn above-market rates on cash simply by paying more attention to where they keep their funds.  

The Yield Curve

We’re living through extraordinary times. The shock of 9/11 pummeled airlines and impacted the economy, but as a country, we rebounded and rebuilt and enjoyed a long bull run that lasted from the Gulf War through to the Financial Crisis. The Financial Crisis prompted a deeper and more prolonged shock to the economy, but the 11-year bull run that has followed generated tremendous wealth, particularly for those who had liquidity and were able to buy at or near market lows. It’s still too early to estimate the impact of COVID-19 on the markets, but at present, it appears that we’re in for both supply and demand shocks, which could result in a prolonged recession that will require fiscal stimulus, not just monetary stimulus. At present, the most pressing social issues relate to health and safety. Financial recovery cannot begin until our epidemiological prognosis improves.

The Role of Cash

In good times, holding cash may feel like a wasted opportunity, as it often barely keeps pace with inflation. But cash is, as it turns out, a remarkably valuable thing to have on hand when markets turn volatile, both because it gives you the confidence to avoid selling at the wrong time, and also the ability to buy at the right time. While you can’t perfectly time the market, it’s possible to be disciplined about increasing your exposure to the market over time through dollar-cost averaging. Removing emotion from the equation enables you to buy equal amounts when stock prices are rising or falling, smoothing out your cost basis. It might feel counterintuitive, but that’s often the winning strategy, enabling you to follow Warren Buffet’s advice to be “greedy when others are fearful.” 

Those who had sufficient cash reserves to resist the temptation to sell, or who bought the S&P 500 during the scariest days of the Financial Crisis, ultimately experienced a more than 300% gain in the decade that followed. While it can be tempting to let emotion sidetrack your long-term plans, holding a large cash cushion can give you the fortitude to remain a disciplined investor and focus rationally on the long term. And if you’re going to hold a cash cushion, you ought to ensure it’s safe and earning as much as possible. If history is any guide, Max will continue to deliver the highest yields in the market on fully-insured, same-day liquid deposits.

Your Answer to Market Volatility Could be Right in Your Wallet

Keeping cash on hand can help you mentally withstand periods of increased market volatility

(Originally published on ValueWalk March 10, 2020)

Volatile markets can be scary. Even for investors who understand that long-term investing is the most proven way to earn returns, watching a sea of red engulf your portfolio can be nerve-wracking. Maintaining the mental stamina required to stay the course and not sell requires fortitude.

With cases related to the novel coronavirus cropping up all over the world, markets have been in panic mode. No one knows what the economic impact will be of the virus or the widespread quarantines that many expect will shut down more cities like Hong Kong and Tokyo.

The Importance Of Maintaining A Cash Cushion

The stock and bond markets can be volatile; that’s a fact of life. No one can control or predict where markets will go or when they will go there. Over the course of an investor’s lifetime, stocks will go up and down, often for reasons unrelated to company fundamentals. That’s why it’s crucial to maintain a cash cushion.

A cash cushion is different from an emergency fund, which you should also have. An emergency or rainy-day fund segregates a year’s worth of living expenses in a savings account (ideally a high-yielding one). This fund is designed for true emergencies: losing your job, unexpected medical bills, or a surprise house move or repair. It’s savings, not investments, because it should be in completely liquid cash so that it’s easy to access rapidly if you need it.

A cash cushion is the next step in your financial fortress and serves two purposes. First, it’s a psychological buffer against worrying about losing money in a market downturn. When the market becomes volatile, you can feel comfortable ignoring those gyrations because you know you have enough cash in the bank. It also allows you to avoid selling at the wrong time—when everyone else is selling. While others are panicking, you can stay invested, which historically has been the smart long-term strategy.

Second, a cash cushion functions as “dry powder.” You can use it to buy more of positions you believe in during a downturn—or keep it waiting until you see value in buying more. In markets like these, having the ability to buy when you feel an investment is cheap can be the difference between strong long-term performance and a lagging portfolio. While few investors can time the market, dollar-cost-averaging has proven to be an effective strategy. Having enough cash on hand to stick with that strategy and keep buying on a pre-determined periodic basis, even while others are selling, can lead to better returns over time.

Keep Pace With Inflation

If cash can be such a helpful asset to have, why don’t more people follow this strategy? The trouble with cash as an asset class is that it drags down your portfolio’s overall returns. Typically, cash barely keeps pace with inflation—and often lags it. The national average interest rate on a savings account in the U.S. is ten basis points, or 0.10%. That’s essentially zero, and far below inflation. This means that for most people holding cash, they lose purchasing power each and every year.

To make your cash more competitive and keep pace with inflation, the most logical place to keep it, by far, is in a high-yielding online bank savings account. Since online banks don’t have branches, their costs are lower, allowing them to pass some of these savings along to their customers in the form of higher interest rates. Banks that are FDIC-insured are safe options for holding cash since as long as you keep your balances below the FDIC insurance limits at each bank, your deposits are backed by the full faith and credit of the U.S. government. From there, you want to make sure you’re tracking which of these banks will offer the highest yield on your cash.

Rates change frequently, so you’ll want to monitor your online savings banks closely to make sure you’re always getting the best rate. Solutions like MaxMyInterest.com track changes in rates and can help you earn more on your cash automatically.

The Coronavirus Panic

If you’ve been earning a decent yield on your cash, and you have enough both for an emergency fund and a cash cushion, you’re in a good situation when a natural disaster like the new coronavirus causes markets to fall. You’ll be able to avoid selling your stocks in a panic because you know you have cash available to meet your expenses. It’s rarely a good idea to join the hysteria when other investors are rushing to get out of stocks, and cash will give you the discipline to avoid selling in a panic. You’ll also be free to buy more shares as the market goes down. Remaining invested and adding to positions methodically has proven to be a time-tested way to generate better returns on your portfolio over the long term.

Everyone holds cash somewhere—it’s the one asset class every investor and household has in common. How you manage your cash can make a big difference in times of volatile markets.

Why Financial Advisors Choose MaxMyInterest to Help Clients with Held-Away Cash

Image by Jan Vašek from Pixabay

When Max launched in 2014 as a way to help individual investors keep cash safe while earning higher yield, few paid much attention. Due to the Fed’s many rate cuts during the financial crisis, people had become accustomed to the idea that cash was a zero-return asset class, and few gave it much thought.

Fast forward to 2020 and everyone seems to be focused on cash and how to earn more. Some of the most influential journalists have picked up the cause, including Jason Zweig at The Wall Street Journal and Jim Cramer on Mad Money, urging clients not to ignore what they could be earning on cash.

Everyone seems to be getting in on the game now, trying to convince you to move your funds to a robo advisor or brokerage firm. But not all of these solutions are the same, and you should always be sure to read the fine print.

Industry experts Bob Veres and Joel Bruckenstein, who publish an annual report on financial advisor technology called the T3/Inside Information Advisor Software Survey, note that the most popular solution among independent financial advisors for helping clients manage the cash they hold outside of the brokerage account is a solution called MaxMyInterest, or “Max” for short.


Why Max is a smart choice for a client’s held-away cash

There are good reasons why Max has become so popular with financial advisors. Max was built out of the simple desire to help people, so a lot of care was put into designing a service that delivers the best yields to clients while being free from any conflicts of interest.

Max works with financial advisors from all types of advisory firms, from independent RIAs to hybrid firms managing trillions of dollars of client assets. Max isn’t a broker or custodian; it simply offers software that acts much like an air traffic controller for cash, helping individuals earn more on cash that they hold in their own bank accounts in a very simple and transparent way.

Notably, Max doesn’t cross-sell other products or sell data. There is no ulterior motive. The company was founded to help people better manage their cash, bringing greater efficiency and transparency to a market that, up until this point, has been opaque and inefficient to the detriment of depositors.

Max includes smart features, such as a patented optimization process that helps ensure a client’s funds are earning the most they can, even as banks change their rates. Intelligent Fund Transfers automatically move funds with one click. And Consolidated Tax Reporting makes tax time as easy as forwarding an email to your accountant.


Why Max appeals to so many clients

Max is simple and easy-to-understand. With Max, funds always remain in clients’ own FDIC-insured bank accounts, held directly in their own names. As a result, clients retain full and same-day access to funds, and can call any bank directly to check on their money, or view all balances through a dashboard on any computer or mobile device. 

But Max is more than just a series of bank accounts – it’s a completely digital user experience where clients can open new accounts in 60 seconds without having to visit a bank’s website, create new usernames and passwords, or deal with trial deposits. The patented Max Common Application is fast and simple, and advisors can even pre-fill the application form for clients with just a few clicks.

Max also delivers preferred rates, higher than those available to the general public, and has arranged other preferred terms, such as higher daily ACH limits and no minimum balance requirements.

Whether used for its built-in cash sweep or used with a set amount of cash, Max is a flexible solution to help a variety of client needs, including:

  • Higher yields and broader FDIC-insurance for those with higher balances of cash
  • As a helpful tool to establish or grow an emergency fund
  • As a way for retirees and those drawing an income to earn more on idle cash


Why Max is the #1 choice for advisors

Since 2015, Max has served the needs of independent financial advisors and continues to innovate to meet the needs of advisors, soliciting advisor feedback at every turn.

Max also offers integrations with leading reporting platforms, including a recently announced integration with Orion

Financial advisors can learn more by visiting MaxForAdvisors.com or by emailing advisors@maxmyinterest.com. Clients can get started earning more right away at MaxMyInterest.com and may choose to link their advisors during enrollment.

Why We Launched Max Checking

Max Checking is a high-yield checking account that allows your money to move automatically to your own higher-yielding, FDIC-insured savings accounts at online banks.

The foundation for Max dates back to the financial crisis, when I was looking for a way to keep my own cash safe and liquid amidst broader turmoil in the market.  In the process, I discovered the higher yields available through online banks, and began managing cash actively to keep it fully FDIC-insured while earning the highest yield possible. This became particularly important as banks were cutting their rates during a rapidly declining interest rate environment.

We’ve made a tremendous amount of progress since then, creating what we believe to be the fastest and simplest account opening process in the industry, arranging preferential rates and terms available exclusively to our members, growing assets optimized through the platform dramatically, and attracting the attention of some of the most influential people in asset management.

We’ve also kept our ear to the ground, listening carefully to every one of our members to understand how they use Max to help them earn more on their cash.  We listened even more closely to those who didn’t enroll in Max, to try to understand why, since most people tell us Max is a ‘no brainer.’

Over the years, we heard six main requests from clients — ways in which they’d like to be able to use Max. Today, we’re launching an addition to the Max platform that addresses all six.

Introducing: Max Checking!

Our goal in launching Max Checking is not to get people to switch banks or open a new checking account.  Many people are perfectly happy with their existing bank and are unlikely to switch.  However, at Max, we’re constantly striving to do better for our members, and so we’ve worked hard to create a compelling offering that delivers better rates and terms than pretty much every bank in the country.  And so we do expect that, over time, many of our members will start to use Max Checking for more of their banking needs. But that’s not why we’re launching Max Checking.

Max Checking was designed to deliver on the promise of helping everyone in America earn higher returns on their cash.  Here are the client requests we’ve heard, and why Max Checking is the answer:

1. Please Support my Bank

When Max launched in 2014, to use Max you had to have an account at one of the four largest banks in the country: JPMorgan/Chase, Bank of America, Wells Fargo, or Citibank.  This was a logical place to start, since these four banks represent 37% of the nation’s deposits.  Over the years we added support for more banks, and now can support customers with checking accounts at 20 of the largest banks and brokerage firms in the country.  But with more than 6,000 banks in the country, not to mention credit unions and brokerage firms, we knew we could do better.  With Max Checking, you can now benefit from some of the highest yields in the country regardless of where you bank or invest.  Simply open Max Checking in 60 seconds and you can then link all of your existing bank and brokerage accounts to Max Checking so you can earn more no matter where you bank or invest.

2. I Want to Link Max to my Savings Account, not my Checking Account

Max’s core architecture originally required that you link your existing checking account to Max.  But many of our members wanted to link Max to their savings accounts instead.  Now, you can link your savings, brokerage, or checking account to Max Checking and start earning more.

3. I Want to Link Max to Multiple Accounts

Many of our members have multiple banking relationships.  Max’s existing architecture required that you pick one bank to link to Max as your ‘core’ checking account, but we saw many of our members using Max to move funds from one bank to another.  With the launch of Max Checking, you can now link multiple checking, savings, and brokerage accounts at multiple financial institutions, so Max can help you earn more on all of your cash, regardless of where it currently sits.

4. I Want to Earn More but Don’t Want Max Sweeping Funds in/out of my Main Checking Account

Max was originally designed for households who saw no distinction between checking and savings. Over the years, we’ve come to know many people who are saving for a specific purpose, and who prefer to allocate a discrete amount of cash into savings to earn more, without touching their checking account.  With the launch of Max Checking, you can now earn more on savings without Max sweeping funds in/out of your existing checking account, so you’ll have even more control over your funds.  Simply make a deliberate allocation of cash to your new Max Checking account and from there, Max will automatically move excess cash to your even-higher-yielding online savings accounts.

5. I Like the Idea of Max but Don’t Want to Share my Credentials

Early on, many prospective Max members were concerned about sharing their login credentials with Max. That’s understandable. With Max Checking, it is now possible to enroll for Max, open up a new checking account and four high-yield savings accounts with preferential rates without ever typing in a bank login or password.  You can even fund your account by wire if you choose, but even if you fund by ACH, Max will never be privy to your bank login credentials.  

With the Max Common Application, we’ve made account opening simple, so you can open multiple bank accounts using a single form without logins, passwords, or the trial deposits that many people have come to associate with online banking.  Faster, simpler account opening.  More FDIC insurance coverage.  Higher rates.  That’s the power of Max!

6. I Want to use Max but Don’t Want to Pay Any Fees

From Day 1, we’ve been committed to our members’ privacy and security. As part of that commitment, we’ve sought to avoid any conflicts of interest. So unlike many websites that offer their products for ‘free,’ only to monetize your data in the background, we don’t sell your data, we don’t accept advertising or referral fees from banks, and we don’t cross-sell other products. 

To cover its costs, Max charges a nominal membership fee to its members. Membership costs just 8 basis points per year, or $80 per $100,000 of cash, which is half of what a typical money market fund charges, yet Max delivers greater liquidity and higher yield.  The higher yield available exclusively through Max often far outweighs our membership fee. Max also includes many additional features such as easier account opening, automatic monthly optimization, one-click funds transfers, and consolidated tax reporting.

Still, we wanted to find a way to do even better for our members.  So, if you choose to keep larger amounts of cash in your new high-yielding Max Checking account, our banking partner, Radius Bank, will reimburse your Max membership fee, up to $200 per year.  For many of our members, this means that Max will be free!

I’m proud of our team, who has worked creatively and tirelessly to bring these new innovations to market.  And I’m even more proud that as an organization, we’ve managed to stay true to our core mission: your best interest.

To learn more or get started earning more, visit MaxMyInterest.com/MaxChecking.

Read the Fine Print: Not all Cash Solutions are Created Equal

Consider the terms & conditions before handing over your cash to a robo-advisor

The financial industry is abuzz with a bevy of new cash solutions aimed at individual investors. Each offers benefits versus keeping funds in traditional bank or brokerage accounts. But it’s important to read the fine print – not all solutions are created equal.

Fundamentally, people hold cash for two reasons: safety and liquidity. Safety typically refers to the preservation of value or the use of cash as a hedge against turmoil elsewhere in the portfolio. Liquidity is for paying monthly bills, funding capital calls, or for the option value inherent in being able to invest at a moment’s notice.

The latter is why Warren Buffett loves cash so much. Holding lots of cash on hand enables you to be “greedy while others are fearful” and also provides the psychological cushion necessary to weather the ups and downs of the market. This may explain why, according to Capgemini, the average high net worth household keeps a surprising 23% of its investable assets in cash. In the midst of the financial crisis when everyone else was selling, those fortunate or prescient enough to hold cash were buying – and they profited handsomely. Had you bought the S&P 500 at the market trough, you’d be sitting on a 300% gain right now, a once-in-a-generation event in public equities investing.

If the most important aspects of cash are that it be kept safe (i.e., fully FDIC-insured) and liquid (i.e., immediate accessibility), why are these new cash solutions falling short on both fronts?

The answer is in the fine print.

Behind each of these cash-like offerings is an old system of brokered deposits. Invented nearly 20 years ago, brokered deposits were a simple way for banks to offer customers increased FDIC insurance coverage to prevent customers from opening up additional accounts at competing banks. Unfortunately, brokered deposits don’t offer same-day liquidity, and sometimes cap withdrawals at as little as $100,000 per day. And brokered deposits aren’t always fully FDIC-insured since deposit brokers often place funds at banks where you might already have a bank account, resulting in less-than-full coverage. Investors typically need to read the fine print to figure out where their funds are being placed and then mail in a written letter to request that certain banks be excluded from the brokered deposit program. Hardly a transparent or practical option for most investors.

Brokered deposit systems work by taking your deposits and selling them to other banks. The deposit broker collects a high-interest rate from the recipient banks – circa 2.50% in today’s market – then keeps a spread for itself, perhaps 0.20%, and passes on a net yield of 2.30% to the client. While advertised as “free,” this offering isn’t “free” at all. As a customer, you’re paying 0.20% for this service, and if you read the fine print, you’ll find that you are taxed on the full 2.50%, even though only 2.30% of that will ever see its way through to your account. Need access to your money the same day? You’re out of luck – your funds are locked up by the broker and not available until the next day. Changed your mind and want to withdraw all your money? You may not be able to do that either due to withdrawal limits imposed by the broker. And if the originating institution fails, you could lose access to all of your funds until the FDIC resolution process is complete.

What’s shocking about these recent developments are that some robo advisors are RIAs that should be acting in a fiduciary capacity are now co-opting the same tools that broker-dealers have used for years to make money on their clients’ cash while marketing these solutions as “free.” They are by no means free. That spread that they keep for themselves is the fee. It’s just hidden in the fine print.

Investors seeking higher yields on their cash have other options. They can look directly to online banks, or solutions like MaxMyInterest, which helps clients obtain increased FDIC insurance coverage, preferential yields, and same-day liquidity on the cash that sits in their own bank accounts, in a manner that’s fully transparent and free from conflicts of interest.

If you’re sitting on cash, you may be fortunate enough to benefit from the next market dislocation. Before you decide to move that cash in search of a higher yield, I encourage you to do one thing: read the fine print.

Gary E. Zimmerman is the Founder and CEO of MaxMyInterest, an independent, intelligent cash management solution that helps individual investors earn more on their cash, free from conflicts or cross-sell. Visit MaxMyInterest.com or MaxForAdvisors.com for more information.

How to Start an Emergency Fund (and Why You Need One)

Image by Gino Crescoli from Pixabay

If you have a financial emergency — an unexpectedly high medical bill, a sudden move across the country, or a job loss — how will you pay for it? Most financial advisors recommend keeping a separate emergency fund that you wall off from your retirement and other lifecycle-related savings accounts. This will allow you to meet urgent funding needs without having to take money from your retirement or educational accounts, which can lead to penalties and tax bills.

It can be difficult to get started with an emergency fund, especially if you’re focused on specific savings goals like buying a house or paying tuition. The best way to make saving a habit is to use behavioral-finance techniques to your advantage. Open an online-savings account at a bank that pays high interest rates, and set up automatic monthly transfers from the main checking or brokerage account where your paycheck gets deposited. That way, you won’t have to think about making a manual deposit. It’s okay if you start with a small amount; the important thing is to be consistent.

While you’re setting up your emergency fund, make sure that you’re earning the highest interest rate possible. This will harness the power of compound interest, which means that the money in your account will earn interest as it sits there, and, if you don’t take it out, will accumulate as the interest goes back into the account to earn even more interest.

Why does this matter? Your emergency fund, by design, is money that you are going to keep on the sidelines and — hopefully — never have to use. Because you are not going to invest it in securities, which are risky, you want to make sure that you can earn as much as possible in interest on your cash in this account. Earning higher interest can help your emergency fund keep pace with inflation.

It’s also important that your emergency fund be kept in an account that’s fully liquid. If you have to access this money, you may need it immediately; you won’t have time to wait the three days that a money market fund will take to get the money back to you. An online savings account solves this problem. You can have the money wired back to your checking account same-day.

Are these accounts safe? Any bank account that is FDIC-insured is backed by the federal government up to $250,000 per depositor, per account type, per institution. If the bank goes under — unlikely, but still possible — the FDIC will return your money up to this limit.

One good way to make sure your emergency fund is FDIC-insured and kept in the highest-rate online-savings accounts possible is to use technology solutions, like MaxMyInterest, to manage it. Max isn’t a bank; it’s software that automatically allocates your funds among high-yielding accounts at online banks, to make sure your money always earns as much as it can safely. You can learn more at MaxMyInterest.com.

Investors Holding 1/4 to 1/3 of Assets in Cash Worldwide: UBS

Investors in the U.S are holding a quarter of their assets in cash, a new survey from UBS Global Wealth Management found this week.

The quarterly Investor Sentiment survey, which analyzed 3,653 investors’ holdings in the U.S., looked at investors with more than $1 million in investable assets during the month of March.

Around the world, investors are holding an average 32% of their portfolios in cash, while in the U.S., 23% of investors’ assets are in cash, the study found. U.S. investors hold less cash than those in Europe (35%), Switzerland (31%), Latin America (36%) and Asia (36%).

This is not what financial advisors would recommend to high net worth investors.

“Cash is a safe asset for a liquidity strategy but a risky one for longevity,”  Paula Polito, Client Strategy Officer at UBS Global Wealth Management, said in a press release announcing the survey’s results. “Right now, we see high levels of cash globally. This is a good time for investors to consider a more diversified portfolio.”

Financial advisors may not recommend a cash allocation that’s as high as this, but investors are likely holding onto all that cash for what they consider logical reasons. Some are waiting for the stock market, now hovering close to all-time highs, to fall so that they can buy in at lower levels. Others have a conservative bent and prefer to keep some assets in cash where it’s not at risk. And some are keeping cash in anticipation of a large purchase, like a home.

What’s nearly certain is that most, if not the vast majority, of this investor cash is earning less than it could. The average interest rate on cash held in savings accounts is now 0.10% (10 basis points). How can an investor earn more on cash? CDs generally pay higher rates, but they lock up investors’ money for a fixed term. Fixed-income investments also pay more, but they are not FDIC-insured, and involve risk.

This is where Max is helpful. The top rate on the Max platform, available only to Max members, is 2.71%. If an investor in the UBS survey has $1 million in assets, including $230,000 in cash, he or she is making, on average, $230 a year in interest on that cash in the bank. The same investor would earn $6,233 each year with Max. That’s the highest rate on FDIC-insured cash anywhere in the country. This interest compounds year over year, to generate even more return on risk-free cash.

Learn more about how to get started with Max and get your cash working harder for you.

Top Rate

Max’s top rate of 2.46% is now higher than the highest advertised rate of any bank.

When we launched Max back in 2014, the premise was very simple: online banks have lower operating costs, and so should be able to pay higher yields to customers than their brick-and-mortar counterparts.  The market dynamics were very similar to what we observed in the word of e-commerce: eliminate storefronts, and goods naturally cost less.  In the case of banking, rather than lower prices, online banking makes possible higher interest rates.  Back then, the average Max member was earning 0.88%, or 0.76% more than the national savings average.  Not bad.

Over the years, we’ve found ways to remove many of the frictions that keep people from earning more on their money.  With the Max Common Application, it’s possible to open multiple high-yield savings accounts by filling out a single form.  With our newest platform banks, we’ve been able to eliminate trial deposits, making it possible to link new savings accounts to your existing checking account instantly.  And for clients who join Max through their financial advisors, we can even eliminate form filing.  Imagine opening a bank account without ever needing to type in your name and address.

As rates have risen, Max members are earning even more.  Today, the highest yield on the Max platform is 2.46% — that’s not only higher than the highest nationally-advertised savings rate in the country, but it’s also a staggering 2.36% higher than the national savings average, which stands at just 0.10%.

How do we do it?  By eliminating customer acquisition cost for banks.  Most banks have to pay hundreds of dollars to attract each new customer account, through a combination of advertising and referral fees.  Who pays for this expense?  You, the depositor, by accepting a lower yield on your cash.  By contrast, Max does not accept advertising or referral fees from banks.  Not only does this eliminate potential conflicts of interest, but it also means that you can earn higher yield on your cash.

Take a look at your existing checking and savings accounts, or put a magnifying glass to your brokerage account statement to see how much you’re earning on cash.  If it’s lower than 2.46%, it might be worth taking a few minutes to see if Max could be right for you.

Does Your Portfolio Spark Joy?

Just as you can clear your closet of old sweaters, you can make your idle cash earn more.

If you’re an accolyte of Japanese decluttering guru Marie Kondo, you are already familiar with her commandment to get rid of anything that doesn’t inspire happiness. Usually this applies to unnecessary things in your home or office: stacks of books you don’t plan to read again, toys your children have outgrown, clothes that don’t fit or are out of style. You might have accumulated souvenirs from travel — too many magnets on the fridge, or a surfeit of knicknacks on bookshelves — or been overly optimistic about how many old magazines you will actually open. Everyone has some area of their life that could use an anti-clutter intervention.

The same logic can be applied to any sort of encumbrance (do you have a vacation home you rarely visit?). So it’s reasonable to consider your investment portfolio to see if you’re getting the maximum amount of joy out of how you’ve allocated your assets.

Look particularly at the cash portfion of your portfolio. If your cash isn’t earning enough, it’s just like clutter: sitting there, taking up space, and not contributing to your happiness.

Here’s how you can make cash work harder for you:

  1. Make sure you are earning the highest interest rates on your cash

If you keep your cash in a checking or brokerage account, or in a regular brick-and-mortar bank savings account, chances are you are earning close to the average interest rate on savings accounts of 0.10%. That’s a waste, because online banks are now paying more than 20 times that amount on cash, FDIC-insured.

  1. Confirm you are not above the FDIC insurance limit on any of your bank accounts

The FDIC limit for deposit insurance is $250,000 per depositor, per account type, per bank. If you have more than that at a bank, the excess is not insured. You can solve this problem by opening accounts at other FDIC-insured banks (ideally those which offer higher interest rates).

  1. Streamline your accounts to ensure a holistic view of your assets

The best way to gain an understanding of your cash is to be able to see a dashboard view of all your cash, no matter where you’re holding it. Many people don’t think about all the cash they have on hand as money that could be working; they only think about investments in terms of stocks, bonds, or other financial assets. Some people trade similar assets through trading platforms similar to questrade, you can learn more about their platform through this questrade review. But knowing where your cash is and what it’s earning is a key part of understanding your whole portfolio.

  1. Automate your accounts to make sure your money is working for you

You can set up multiple online bank accounts, research their interest rates, and move money among them to make sure you’re always getting the best rate. But this DIY approach is a lot of work, and it violates another principle of decluttering your life: simplifying your schedule so that you can spend time doing what you truly enjoy.

Instead, a service called Max can do all this for you. Max helps you link your existing brick-and-mortar checking account or brokerage account to higher-yielding online savings accounts where you can earn more. Max monitors rates daily and automatically moves your funds so that you’re always earning the highest rate. Learn how Max can help you earn more on your cash.