(Originally published in Bond Buyer December 1, 2020)
Money market funds (MMFs) have long been a staple in brokerage accounts as a safe place to stash cash that’s not being invested. In light of the events of the past year, it’s time financial advisors and their clients re-examine this approach.
Historically, MMFs have been used to provide safety, liquidity, and yield. In today’s market, these funds now fall short on multiple fronts. The onset of the Federal Reserve’s zero interest rate policy has eroded the value proposition of MMFs considerably, to the point where several trillion dollars of MMFs are no longer an attractive option for individual investors.
To understand why, we must first examine the origins of MMFs. The idea was remarkably simple: help clients obtain a higher yield than bank accounts by buying short-term government securities. Pooled together, there were sufficient funds to actively trade in and out of these securities, picking up yield by taking slightly longer duration and a little bit more risk. With enough scale, a fund manager could be paid circa 0.15% in fees to select, buy, and sell these bonds, and investors could pick up higher yield through an instrument that looked pretty safe, given that the underlying securities were government bonds and other short-term paper. As long as all investors didn’t run for the exits at the same time, clients would be able to access funds the next-day, while earning yield that was higher than that offered by a brick-and-mortar bank account.
Of course, there’s rarely a free lunch in finance. This became painfully apparent during the financial crisis when the Reserve Primary Fund broke the buck. When investors sought liquidity from this MMF at the same time, the underlying securities had to be sold at a discount and investors lost principal when they couldn’t get back 100 cents on the dollar. While there have been few such failures of MMFs relative to the trillions of dollars in these funds over the past few decades, taking on the risk of any loss of principal only makes sense if you’re able to pick up additional yield that justifies it. Today, that risk-reward equation doesn’t hold, since MMFs yield substantially less than FDIC-insured online savings accounts.
Many Fed watchers expect the current near-zero rate environment – which has driven down MMF yields – will persist for several years. One need only look at the yield curve to conclude that low-interest rates will be with us for a while. The recovery of our economy – and thus, rate policy – will depend significantly on the course of the pandemic.
The most prominent government MMFs yield only five basis points (0.05%), and while prime funds may yield slightly more, they also carry more risk. Under the Securities and Exchange Commission’s new rules promulgated following the financial crisis, retail-held prime funds can be subject to 10-day redemption gates and redemption penalties of 1-2% in periods of financial stress, making it potentially even harder to access cash when needed. For clients seeking safety, liquidity and yield there are far better options than MMFs.
What’s a much simpler solution for keeping client cash safe? Plain vanilla FDIC-insured savings accounts. Today’s leading online banks – which are able to pay higher yield by eschewing brick-and-mortar branches – are delivering yields of 0.40% to 0.60%. Through platforms like MaxMyInterest, some are even able to pay rates as high as 0.85% — a full 80 basis point premium over a government money market fund. With the funds sitting in FDIC-insured and same-day liquid accounts, this incremental yield comes with greater safety and liquidity as compared to an MMF.
Sadly, institutional investors can’t easily benefit from FDIC insurance coverage in scale and so will remain beholden to MMFs for the time being. But, for retail investors who hold six-to-seven figures in cash, FDIC-insured bank accounts can deliver dramatically higher yield than money market funds.
Given the recent economic challenges and market volatility, financial advisors are looking for safer, higher-yielding options for their clients’ cash – and are turning to one that was previously overlooked: online saving accounts. Advisors would be smart to take note of advisor-oriented solutions that can help clients maintain a cash cushion during times of financial stress while earning higher yield along the way.
Take a look at your clients’ brokerage statements. If they’re sitting in MMFs or earning 0.01% on a broker’s cash sweep, it may be time to reevaluate your strategy for cash. Your clients will thank you.
When we started MaxMyInterest seven years ago, in the wake of the financial crisis, the premise was simple: how can we help individual investors keep their cash safer while earning more at the same time?
The safe part was easy — hold your cash directly, in your own name, in your own bank accounts, but spread it across multiple banks, so that you can obtain more FDIC insurance coverage. By avoiding brokered deposit systems or other gimmicks that promise high yield through obscure structures, you’d always know exactly where your cash was since it was always in your own bank accounts that you could access same-day if needed.
The ability to earn more was also pretty straightforward. It was 2013, and e-commerce was growing rapidly. It had become obvious to most that you could buy a book online for less than the in-store price because you weren’t paying for the costs of operating the store. A book is a commodity, and absent the costs of rent, air conditioning, etc., online stores could sell the book at a lower price and still earn the same profit, if not more.
Putting these two concepts together led to the creation of MaxMyInterest: a platform that would help you keep cash safer while earning more by leveraging the efficiencies of online banks. But we noticed one additional, often-overlooked factor: unlike a book that you purchase once, with a bank account, you’re really making a purchasing decision every single day. Because interest rates change, you don’t want to choose the highest yielding bank today, you want the highest-yielding bank every day.
So we took Max one step further: rather than try to pick banks at a single point in time, we made it easy to open multiple bank accounts at once. Max’s software then automatically routes your cash to whichever of your banks is willing to pay you the highest yield each month.
Along the way, we discovered yet another inefficiency in the market. Historically, banks have had to pay to acquire their customers. Even without branches, online banks still spend a fortune on advertising and click-through referral fees. The result: every dollar that banks spend on customer acquisition is a dollar less that they could pay you in interest.
As the Max platform grew, we found we were able to leverage the scale of our business to drive even more scale, arranging preferential rates and terms for our customers — rates that could only be found on the MaxMyInterest platform. Since Max doesn’t accept advertising, referral fees, or payments per deposit, banks are able to attract high-quality customers at lower cost. In turn, they can then afford to pay higher yields to Max customers. It’s a virtuous cycle that gets better as more and more customers discover Max.
As Max has grown, we’ve invested in making it even easier to open new bank accounts, so that as we add new banks to the platform, Max customers can open new accounts in as little as 20 seconds. No logins, passwords, or trial deposits; just a few clicks followed by near-instant approval.
Amidst the COVID-19 pandemic, where much uncertainty remains and interest rates are ultra-low, earning as much as possible on your cash while keeping it safe and liquid is as important as ever.
(Originally published in Bond Buyer September 22, 2020)
The conventional wisdom has been that clients should keep six to 12 months of living expenses in cash in case of job loss or another unexpected event. While that is sound advice, in the age of COVID-19, this may no longer be enough.
Some people think of cash narrowly — as a form of personal working capital necessary to cover day-to-day living expenses. But it’s worth revisiting this viewpoint, particularly in a midst of a pandemic of uncertain duration.
“For many clients, a much larger cash cushion may be advisable.”
Cash plays a much larger role in our portfolios, and in our psyches, than we might care to admit. As a result, for many clients, a much larger cash cushion may be advisable, to serve as an important source of stability and optionality. Beyond the necessity of keeping cash on hand to meet ongoing obligations, having a larger cash cushion enables clients to mentally-withstand a much broader range of events, from personal dislocation to market volatility.
Staying the course
As the COVID-19 pandemic unfolded, it became apparent that many aspects of our daily lives would soon be in flux. While many clients became concerned by a correction that drove down market indices by more than 35% in a matter of weeks, astute advisors were able to hold clients’ hands and help them stay the course. But for some clients, the volatility was too much to bear, and they strayed from their long-term plan and sold securities. Within weeks, the broad market indices had recovered, and in some cases, surpassed their pre-pandemic highs. Unfortunately, those investors who sold in a panic lost out.
Having a larger cash cushion can help clients stay true to their long-term strategies and avoid selling at precisely the wrong time. Holding cash can thus help clients boost portfolio returns simply by providing the psychological insurance necessary to remain invested.
Many months into a pandemic that still shows few signs of abating, and with an unemployment rate hovering around 20%, a six-month cash cushion may also be insufficient to bridge the gap for those who experience job loss, or for business owners who may not be collecting the monthly distributions to which they had become accustomed in a pre-COVID world.
Those fortunate enough to already have several years of operating cash on hand are able to think longer-term. In addition to being able to support their families and businesses, they can make new investments at a time when others might shy away from providing capital.
The ability to make investments during downturns offers investors the opportunity to earn outsized returns. Cash isn’t just a hedge; it’s the ultimate in option value, providing the ability to invest when capital is otherwise scarce.
Personal flexibility and optionality
In cities across the country, many people are re-thinking their desire to live in close proximity to their neighbors. With parents working from home and children attending school remotely, many families are placing a premium on having more space — both indoors and out. As a result, suburbs are experiencing a renaissance as city-dwellers are relocating to ride out the pandemic.
Those with extra cash on hand have the privilege of being able to deploy it in an instant to rent or purchase another home without having to sell their existing residence in a panic. Advisors who can help clients through these emotionally challenging times can earn clients for life.
In summary, cash is much more than working capital; it should be considered a strategic asset class. It can protect clients against the unexpected, help them earn higher returns by staying the course, achieve greater personal flexibility, and make new opportunistic investments at a time when others are fearful and capital constrained. It’s no wonder why clients are increasingly asking their advisors about cash.
(Originally published on ValueWalk April 28, 2020)
Mark Twain is reputed to have said that “history does not repeat itself, but it rhymes.” The events of the past few months have certainly conjured up many memories of the Financial Crisis, and for those following bank stocks, the emotional roller coaster of 2008-2009 feels all-too-present today. The fate of many of our nation’s banks may rest largely on how long our economic paralysis is sustained in support of the greater good of public health.
Bankers and research analysts agree that American banks are much better-capitalized than they were a dozen years ago and should be able to withstand several months of severe economic contraction. But if the economy were to remain largely shut for six months, absent a windfall of additional money-printing from the Fed, another financial crisis could ensue atop our existing humanitarian crisis.
With all this doom and gloom, there is a glimmer of hope. Like every other financial or humanitarian catastrophe to befall our modern age – World War I, The Great Depression, World War II, Black Monday, the collapse of Long Term Capital Management, the Dot-com bust, 9/11, and the most recent Financial Crisis – the path downwards has been followed by an even more ebullient path upwards. The shape, timeline, and certainly of any future recovery is unknowable, but we can hold out hope that it will at least rhyme with the events of the past.
I’ve had the experience of living and working through several market dislocations. From each one, I’ve sought to learn how to extrapolate from relevant data and facts, and, perhaps more importantly, how to recognize and curtail emotions. While every investment brochure disclaims that “past performance is not indicative of future results,” as an investor, it’s important to learn from your own past performance and journal your mistakes. Only by dissecting your thought processes at the time – both rational and emotional – can you endeavor to make better decisions the next time you are faced with a similar set of facts and circumstances.
Online Banks: The Financial Crisis As Inspiration
I was stationed in Tokyo during the Financial Crisis, working as an investment banker for one of the largest American banks, which had recently acquired one of Japan’s largest brokerage firms. I arrived in August 2007, just after closing the last private equity-based capital raise that involved so-called “Toggle Notes,” where a borrower could elect whether to pay the interest it owed in cash or in-kind (i.e. more debt.) It was illustrative of just how favorable the capital markets had become for issuers – a sign of a raging bull market where seemingly nothing could go wrong.
As an analyst on Wall Street in the late 90s, I learned that the hallmark of the late stage of a bull market is when the market “climbs a wall of worry.” In other words, in spite of each piece of bad news that could befall the economy, stock market indices continue to march upwards. In addition to overly accommodating capital markets, several other more pedestrian warning signs were also present by the summer of 2007. The drivers who shuttled me home from the office late at night were increasingly talking about their stock market gains and the houses they were flipping for profit. In-flight magazines contained countless ads for hi-rise luxury condominium developments. Were these signs of a healthy economy where the rising tide lifts all boats, or a warning that the pace of wealth creation was unsustainable?
As 2007 progressed into 2008, the unsustainability of the bubble in asset prices became all-too-apparent, and banks began to fail. From 2008 through 2012, the FDIC closed a staggering 465 banks. To put this in context, in the five years prior to 2008, only ten banks had failed. The bank where I worked didn’t fare much better. Bearing witness, first-hand, to such a precipitous fall from grace taught me an important lesson in the fragility of banks. No matter how storied the name or how solid the marble that adorns its branch entrances, banks exist at the pleasure of investors and depositors’ willingness to extend credit in exchange for levered returns.
The Importance Of Keeping Cash Safe
In response to the Great Depression, President Roosevelt and Congress enacted the Banking Act of 1933, paving the way for the creation of the Federal Deposit Insurance Corporation (FDIC). When my bank’s share price hit $0.97 in March of 2009, it struck me that much of my cash held at that bank might be in peril. While the FDIC provides deposit insurance, that coverage is limited, and every dollar that you hold above the FDIC insurance cap makes you, in effect, an unsecured creditor of that bank. I realized that in order to keep cash safe, I needed a better solution.
I began researching options for cash. Many banks and brokerage firms offered brokered deposit solutions, where a bank takes your excess deposits and sells them to other banks. The pitch is that this helps you obtain increased FDIC coverage, and so you should feel safe keeping all of your funds at your home bank or brokerage account. But my research revealed several risks inherent in this system, as well as large conflicts of interest. If I was to ensure all my cash was safe and liquid, I needed a better solution.
The best thing I could think of was to open new bank accounts at multiple banks and diversify my holdings by spreading my cash across them. I’d hold each account in my own name, control how much was kept at each bank (to ensure all funds remained below the FDIC limit at each bank), and retain full same-day liquidity at each bank. Unlike brokered deposits, where you might not be fully insured if the broker sells your deposits to a bank where you already hold accounts, and where you could lose access to all your funds if your main bank goes under, with my strategy, I knew that I’d maintain full control, full liquidity, and full FDIC-insurance coverage.
Online Banks And Interest Rates
In 2009, online banking was still relatively nascent, but, it turned out, opening new accounts at online banks was much faster and easier than going into a bank branch. I opened accounts at several of the leading online banks, which also happened to offer higher interest rates than their brick-and-mortar peers, owing to their lower operating cost structure. Much like Amazon had figured out how to sell a textbook cheaper by eschewing physical stores, online banks applied this concept to banking, making it possible to earn a higher interest rate on FDIC-insured savings accounts.
Still, the online banks changed their rates with great frequency, and often when I logged in to check my balances, I found that interest rates had changed. It occurred to me that I could move funds from one bank to another to benefit from yet-higher interest rates. For the next three-and-a-half years, I found myself logging in each month, checking rates, and manually moving funds from bank to bank to obtain the highest yield while keeping all my funds FDIC-insured.
This strategy could be highly lucrative (effectively capturing a pure arbitrage in the market for bank deposits) but also a huge time sink. There had to be a better way. How could I automate this process, so that my money could continue to earn the highest yields possible without my having to lift a finger? And if I could find a way to automate the management of my own cash, why couldn’t I open up this same strategy to anyone else who wanted to simultaneously earn higher yields with less risk?
Online Banks: Conclusion
The result: I created my own automated cash management platform – MaxMyInterest.com. Seven years and three patents later, Max is now the highest-yielding cash management solution in the United States, used by financial advisors at thousands of wealth management firms with more than $1 trillion of assets under management. With a top yield of 1.71%, Max stands above all other cash options offered by banks and brokerage firms – yet, the core premise remains the same as it was back in 2009: deliver the best yields, fully FDIC-insured, with same-day liquidity and no conflicts of interest.
While it may be difficult to envision now, the COVID-19 crisis shall too pass. And, if history does indeed rhyme, in its wake American ingenuity and determination will likely push our economy and financial markets yet higher – although the recovery may be long and uneven. As an investor, your appetite for risk may again increase, too. But for the portion of your portfolio that remains in cash, you should remain as protected and earn as much as possible.
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.
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.
(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.
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 firstname.lastname@example.org. Clients can get started earning more right away at MaxMyInterest.com and may choose to link their advisors during enrollment.
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.
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.
Max helps you earn dramatically more on your cash, without switching banks. Max also helps you obtain more FDIC insurance coverage, up to $2.25 million per individual or $9 million per couple.
Start with your existing checking or brokerage account, and then link additional higher-yielding savings accounts at some of the nation's leading FDIC-insured online banks. Max keeps an eye out for changes in interest rates, helping your money automatically flow to the banks that offer the best rates, while keeping your balances below the FDIC insurance limit at each bank. Max also helps you maintain a target checking account balance each month.
Max lets you see all balances on one screen, transfer funds with a single click, and obtain all 1099-INT tax forms in a single PDF.