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.
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.
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.
After eight years of near-zero yields, clients are eager to earn higher returns. Financial advisors want to deliver greater returns without taking on more risk. Advisors are using a novel technology, called Max, to achieve both of these goals, helping clients earn more while growing assets under management.
Which asset class can generate an incremental 0.90% of return, without taking on risk or sacrificing liquidity? The answer lies in a forgotten corner of client portfolios: cash. Most investors are earning little to no interest on their cash held in their bank or brokerage accounts. Since yields have been so low for so long, most financial advisors don’t spend much time thinking about cash. Instead they focus on higher-return asset classes like stocks, fixed income, or alternative investments.
But how much clients earn on cash can make a significant difference to the overall performance of their portfolios. Here’s the math: the average high-net-worth investor holds 23.7% of his or her net worth in cash, according to the 2015 CapGemini/RBC Wealth Report. Earning an extra 0.90% on that cash means the portfolio as a whole will earn 0.21% more. Because it’s cash in the bank — FDIC-insured — this incremental return is risk-free.
Max is an intelligent cash management service that automatically allocates clients’ cash between their existing checking or brokerage account and a portfolio of higher-yielding FDIC-insured savings accounts at the nation’s leading online banks. Most Max clients are earning more than 1.00%. By contrast, many bank or brokerage accounts pay only 0.01% or 0.02%.
How does Max help clients earn more on cash? By capitalizing on the efficiency of online banks. These institutions don’t have branches, and their lower cost structure allows them to pass along more yield to clients who deposit cash with them.
For financial advisors, offering Max to clients has the effect of bringing held-away cash into view. Over time, clients migrate cash towards Max, where they can grant their financial advisor read-only access to their balances through the Max Advisor Dashboard (a free service for financial advisors.) With the ability to see the cash that clients are holding, advisors can spark a new conversation about portfolio allocation, and often nudge some of this cash into higher-beta asset classes.
Max is not a bank, nor does it provide financial advice. Max is a technology-driven tool that automatically optimizes a client’s cash balances among accounts at online banks held in the client’s own name. Clients retain direct access to their funds, maintain their relationship with their primary checking-account bank, and can continue to use all bank services like notaries and tellers.
Max members are earning approximately nine times as much on cash as the national average.
We all know that interest rates have remained low for the last eight years, a deliberate policy on the part of the Fed to keep the cost of funding low to help spur the economy. This has made it easier for people to borrow money to buy homes, propping up the housing market. It has been good for the stock markets, helping companies refinance high-cost debt and fund share repurchases. And it’s been favorable to hedge funds as well, reducing the cost of leverage used to boost returns.
Where low rates have had a negative effect is on investors’ cash in the bank, which yields barely anything.
There’s something odd at play this time around, though. Historically, money market funds yielded more than bank savings accounts. No longer. Most money market funds yield a small fraction of what is currently being earned by Max members.
Even more surprising, though, is the fact that term deposits and longer-term bonds are yielding far less than online banks these days. The yield on the 2-Year Treasury stands at 0.84%, and 5 Year CDs at most brick-and-mortar banks hover around 0.60%. At Chase Bank, a 10-year CD pays 1.05% — and that’s only if you keep $100,000 or more in the CD, and lock up your money for 10 years.
We at Max are puzzled as to why investors would buy 2 Year Treasurys or lock their funds up in bank CDs when it’s possible to stay liquid and earn up to 1.05% on FDIC-insured bank deposits, with no minimum deposit level.
With rates expected to rise, online banks seem like the most logical place to keep cash. As interest rates go up, cash held in these accounts can be expected to follow the upward movement in rates. With Max, cash automatically flows to the banks with the best rates, even as these banks vie to offer the highest yield on savings. This happens while keeping cash safely below the FDIC insurance limits at each bank.
While hedge funds can’t take advantage of the higher yields available through online banks, individual investors can earn significantly more by keeping cash in these online accounts. Learn how MaxMyInterest.com can help with a fully-automated solution that makes it easy to open and manage online bank accounts, all without changing how you interact with your existing checking account.
The U.S. Treasury in Washington, D.C. (Source: Treasury.gov)
Certain truths are thought to be self-evident, like the idea that bonds always pay more than cash in the bank. In today’s interest-rate environment, that’s not true. The highest interest Max members can earn is now 1.05%, while the 5-year U.S. Treasury bond currently yields 1.03% and the 3-year bond yields 0.77%. It’s part of the worldwide flight to high-quality assets after the U.K.’s vote to leave the European Union. Many investors are worried that “Brexit” may severely hurt the world’s economy.
What does this mean for investors? Both yields are backed by the U.S. government; the Treasury bond is a government obligation, while Max members are holding their cash within FDIC-insured savings accounts at online banks that are also guaranteed by the government. So the risk profile is the same.
FDIC-insured bank deposits are fully liquid, meaning you can withdraw your money at any time. Bonds, on the other hand, aren’t risk-free; changes in interest rates can cause their prices to rise or fall, introducing what’s known as duration risk. If you buy a bond now and then yields rise, you’re locked in at the old, lower yield, meaning the market will be willing to pay less for your bond and the price will fall. So unless you hold it to maturity — the entire five years — you’ll lose money.
While buying a Treasury bond means you’re exposed to changes in interest rates, Max members benefit from optimized rates. If the rates on their online savings accounts change, Max will automatically rebalance their funds into higher-earning accounts.
So why would anyone buy Treasury bonds? Normally, if you’re willing to lock up your money for longer periods of time, you get paid more for taking that duration risk. But not today. At these yields, you can earn more with overnight bank deposits than you can even on a five-year Treasury. This inefficiency impacts hundreds of billions of dollars of cash held by individual investors.
We built Max to make it easier for individual investors to more effectively manage the cash that they hold, whether it’s in their bank accounts or brokerage accounts. Max simultaneously delivers higher yield and broader FDIC insurance coverage, with full liquidity, and without switching banks.
The national average yield on cash held in savings accounts is 0.11%, and many bank and brokerage accounts pay even less. If you’d like to earn more on your cash, or are seeking broader FDIC insurance coverage, or want to keep your funds fully liquid and don’t want to take the risk of investing in Treasurys when it seems like yields have nowhere to go but up (and thus the value of those bonds have nowhere to go but down), keeping cash in high-yielding online savings accounts might be the answer for you.
For financial advisors, cash is often the forgotten asset class.
High net worth households are holding about one-quarter of their assets in cash. But financial advisors say their clients have 10% of their portfolios in cash. These are the same investors; why the discrepancy?
Financial advisors are charged with managing their clients’ investment portfolios. That includes stocks, bonds, and other asset classes — but it frequently excludes cash. That’s because investors often hold cash across multiple institutions — in their checking account, brokerage account, and perhaps other banks as well — and may only tell their advisor about the portion of their cash they intend to use for investments. They may not realize that they could be earning significantly more on this cash, or that they should be apportioning it to take full advantage of FDIC insurance.
With the new Max Advisor Dashboard, when an advisor’s clients become Max members, it’s now possible for the advisor to see all client cash holdings in one view. This is good for both the advisor and the client.
The client gets all the benefits that come with Max membership, starting with more yield on cash: currently about 1%, or 10 times as much as the national average. Max automatically optimizes accounts for FDIC coverage, and makes sure members always are earning the maximum interest possible across their accounts. The client can optimize accounts on demand, instruct money to move from checking to savings and back, and receive one file with all their 1099-INT tax reports.
For the advisor, the benefit is in being able to offer clients a higher yield on cash than the current rate offered at most institutions. Gaining a view of clients’ cash held in different accounts means that advisors know what funds are sitting on the sidelines in case investment opportunities come up. And advisors can now have a conversation with clients about what the cash is for, and how to make the best of it.
Clients can grant their advisors read-only access to their Max account simply by adding their advisor’s email to their Profile page. In addition to gaining visibility over client cash balances, advisors will find additional materials on the Max Advisor Dashboard, including setup guides, explanatory materials, and a sample email to clients to let them know about this new offering.
Max helps you earn dramatically more on your cash, without switching banks. Max also helps you obtain more FDIC insurance coverage, up to $2 million per individual or $8 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.