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

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

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

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

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

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

The answer is in the fine print.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why Millennials Love Cash

Millenials Love Cash—Here's Why

Most millennials prefer cash for long-term investing, according to a new survey.

For a generation that’s grown up with a smartphone in hand, millennials are surprisingly wedded to the most old-fashioned of investments: cash. That’s a conservative strategy, but it raises the specter of whether these young workers will build their portfolios quickly enough.

Americans between the ages of 18 and 29 were the most likely age group to choose cash as their ideal place to stash money they don’t plan to use within a decade, according to a survey from Bankrate.com. Thirty-nine percent of millennials said they would invest their money in cash if they didn’t need it within 10 years, triple the number who said they would buy stocks.

That could be a problem, because investment returns, compounded, tend to grow over time, if a portfolio is performing well. The more millennials earn on their investments today, the more these gains can grow throughout their working years. For Americans as a whole, one in four said they’d pick cash over other long-term investments. The report also found that Americans feel they haven’t saved enough money. For every survey participant who thought they had saved a sufficient amount, two survey participants said they don’t have a large enough savings reserve.

The report points to twin problems investors have today: a propensity to hold cash to avoid risk, alongside a nagging feeling that their portfolios won’t be large enough to support their future needs.

There are many reasons why millennials, and Americans as a whole, might feel more comfortable with large cash holdings. The global financial crisis is only a few years in the past, and many market participants might still hold bad memories of that experience. Warren Buffett’s Berkshire Hathaway now holds $111 billion in cash. Many millennials either suffered losses among their own investments during the last crisis or watched family members lose money in the markets. With cash, they’re not taking a gamble on stocks.

Similarly, the housing market crash and subprime-mortgage bust that accompanied the crisis may have sparked an aversion to buying real estate (or perhaps millennials just can’t afford to buy houses). Millennials as a group also owe record amounts of student debt, and they may feel they can’t risk the money needed to make those payments. All this contributes to a desire to hold cash rather than riskier investments that hold the potential for a higher return, such as real estate investing itself, if millennials are looking for profit opportunities they have many options open to them, such as real estate investing courses via Roofstock, this gives them the option and interest to invest in something other than cash, and for possible massive returns too.

For investors of any age who want to hold a large portion of their portfolios in cash, it’s essential to consider both the interest rate on that cash and the degree to which their cash is protected by government deposit insurance. According to Bankrate.com, the average interest rate on bank deposits in U.S. savings accounts stands at 0.09%, while some online bank savings accounts pay more than 1.80% in interest, often with no minimum balance or monthly fees. Because of the power of compounding, that additional interest can make a large difference over a millennial’s long investment horizon.

As long as these online banks are guaranteed by the FDIC, the deposits are insured up to $250,000 per depositor, per account type, per bank, to guard against a bank failure. That’s essential for the investor who is holding cash to keep that money safe against all eventualities.

Here at Max, our system is ideal for investors of any age who choose to hold larger amounts of cash. Max helps depositors avail themselves of the higher interest rates paid by leading FDIC-insured banks. For millennials, signing up for Max could be a smart choice. Even if they’re not prepared to take greater risk by buying real estate or investing in the stock market, with Max they can at least earn up to 20 times the national average on the cash that’s sitting in their checking or brokerage accounts, while helping ensure it is fully protected by FDIC insurance.

Learn more about how Max helps investors earn higher yields on cash.

Cash = Happiness, Science Finds

This may be the insight that explains everything: people are happier the larger their bank balance grows.

Everyone knows that money can’t buy you love. But cash can buy you happiness, apparently — as long as you don’t spend it. That’s the conclusion of a recent academic paper, “How your bank balance buys happiness: The importance of ‘cash on hand’ to life satisfaction,” by researchers Peter M. Ruberton, Joe Gladstone, and Sonja Lyubomirsky.

Accumulating assets has long been a bulwark against unhappiness. But this study, which looked at UK bank customers, reveals that your ATM receipt can be a better predictor of satisfaction than an overall portfolio statement or your total net worth.

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Mr. Gladstone told The Wall Street Journal.

The study doesn’t determine why exactly cash makes us happy. But liquidity can confer many advantages: peace of mind, insurance against emergencies, or an ability to pounce on opportunities when they become available.

At Max, our members tell us that they hold onto cash for a myriad of reasons: for dry powder, to snap up assets when their prices drop; for specific future purchases; or for capital calls.

Because Max automatically optimizes members’ cash, keeping it under the FDIC limits and making sure it’s earning the highest possible yield, our members don’t have to worry about whether their cash is safe. They can rest easy knowing that their cash is earning among the highest yields possible, while focusing on the happiness they feel when they look at their Max statement.

To learn more about Max and how it helps optimize yield and FDIC insurance for cash, visit maxmyinterest.com for individuals or maxforadvisors.com for financial advisors.

What’s Better for Clients Than Money Markets? Max.

This week, Max is at the T3 conference in Orange County, Ca., which is spurring us to think about financial advisors and how we can help them best serve their clients.

As financial advisors think about where to put their clients’ cash, many head automatically toward money market funds. But in today’s regulatory environment, where money market funds pay ultra-low rates and can force investors to pay redemption penalties in times of market turmoil, they may no longer be the best choice.

There is a better solution for cash held in brokerage or bank accounts. It’s called Max.  

Some statistics about cash: high-net-worth households in the U.S. are currently holding 23.7% of their assets in cash. That works out to a staggering $3.5 trillion, just among the top 4% of the U.S. population.

Most of this cash is being kept in the wrong place. In money market funds, it is under-earning its potential and it’s not insured.

Clients hold cash for a host of reasons, including as a reserve for a future real estate purchase, private equity capital call, or other asset buy. A recent U.S. Trust survey showed that a majority of clients were holding cash on the sidelines to serve as “dry powder” to capitalize on market opportunities. That’s the same reason why Warren Buffett has said he likes cash so much.

Most financial advisors think that clients aren’t holding much cash because what they see is the cash allocation within the client’s investment portfolio. The reality is that there’s a lot more cash sitting on the sidelines, out of view of the advisor. Most high net worth investors maintain multiple advisory relationships at several institutions. Advisors’ wallet share is only what clients choose to bring to them.

Where is this cash being held? Up until this point, the default for many financial advisors was to keep client cash in a money market fund. This is no longer best practice, especially in a fiduciary environment. It’s difficult to justify offering your clients less of a yield on uninsured cash when there’s a solution that allows them to earn more and stay FDIC-insured.

After the 2008 financial crisis, the SEC imposed new rules on money market funds, rendering them no longer a true cash equivalent. Under the new regulations, retail-held prime funds are subject to redemption gates of up to 10 days and redemption penalties of 1-2% in periods of financial stress. This means that your clients may not be able to access their funds when they need them most. At the same time, yields on money markets are still relatively low, and these funds are not insured.

How can Max solve these problems? Max offers a tool that lets advisors bring more cash into view, help clients earn more on that cash, and help ensure that cash is fully insured. We’ve created a better solution for cash, offering liquidity, higher yield, and greater FDIC insurance. Max doesn’t take custody of clients’ funds. Their cash stays in the client’s own name, while our software acts as a sort of air traffic control system, telling the banks to move funds among the client’s own accounts whenever it’s advantageous to do so to get better rates. In this manner, clients continuously earn the highest yield possible within the FDIC limits. That means Max members can keep up to $5 million per couple insured, and we have a partner solution that can deliver up to $50 million of FDIC coverage per tax ID for business accounts or complex trusts.

Now that money markets are considerably less attractive, isn’t it time to find a better way to manage cash? Learn more about Max at MaxForAdvisors.com.

3 Ways to Maximize Your Company’s Cash

Cash should be working its hardest for you. That’s especially important for corporate, foundation, and nonprofit cash. This money has to be kept safe — it’s needed for payroll, ongoing expenses, or acquisitions — so it can’t be invested in risky securities. In today’s low-rate environment, it can be tough to find a safe place to keep cash that allows it to earn interest.

Here are three ways treasurers can maximize both safety and yield.

  • Online savings accounts

Some online banks offer commercial accounts that yield more than what your brick-and-mortar bank pays. Be aware of FDIC insurance; choose a bank that is part of this government guarantee program, and make sure to keep your company’s account below the $250,000 limit.

While you won’t have a branch, online savings accounts make it simple to move money to and from your company’s regular checking account using ACH (likely the same way your company handles direct deposit for payroll). You can also arrange wire transfers if you need the money to move the same day.

  • CDs

A certificate of deposit, which pays a fixed return that’s usually higher the longer the term of the CD, is a safe place to keep your corporate cash — as long as it’s FDIC-insured. The drawback of a CD is that your money is typically locked up until the end of the term, and you may have to pay a fee to retrieve it early. This makes CD a less attractive option for businesses that need access to their cash.

  • Max for Business

We think companies should be able to earn a higher yield on their cash, FDIC-insured, just as individuals can by using Max. That’s why we’ve partnered with the American Deposit Management Co. to offer high-yield, FDIC-insured accounts to commercial, institutional, nonprofit, and trust customers. Through Max, ADM offers a preferred yield of 0.75% on balances up to $5 million, and a competitive yield on balances up to $50 million, all FDIC-insured. ADM clients include top U.S. corporations, municipalities, universities, public funds, non-profits and trusts.

Learn more about Max for Business or contact member.services@maxmyinterest.com.

 

How to Earn More on Your Bonus with Max

Bonus season: It’s time to jet away.

It’s almost bonus season, which means it’s time to think about what you’ll do with the money you earn — and how you’ll get that money to work harder for you. In today’s rising-interest-rate environment, your bonus can earn more before you spend it. 

Where should bonus checks go? Researchers have found that it’s experiences that make people happy, not objects. Spending money on vacations, theater tickets, parties, and memorable dinners out can lead to more happiness than big-ticket purchases like cars, jewelry, or clothes. Some people also find happiness at the nexus of things and experiences, for instance with summer homes, which are both an asset purchase and a venue to get family and friends together.

Investing for the long term is also smart. A bonus is a good way to pre-fund a higher-education 529 account for college-bound children or grandchildren, for instance. Tax rules allow you to contribute 5 years’ worth of your allowable contribution at once; check the IRS website for details. Or set aside an amount you’d like to put into equities or fixed income investments, and use dollar-cost averaging to buy a small amount each week or month. This method allows you to you get the best average price for the whole investment.

Many choose to keep their bonus mostly in cash, either to wait for an investment opportunity to become available — if the market falls, for instance — or because they’re anticipating an expense in the future, like a tuition bill or a private-equity fund capital call. Some firms also have regulatory or compliance rules around what investments employees can buy, leading many professionals, like attorneys and traders, to keep their bonuses in savings accounts.

While that money is in the bank, it’s only smart to make sure it’s earning the most interest possible. Many investors may not realize it’s possible for a bonus check to earn more than 1% in interest in FDIC-insured savings accounts — ten times the national average.

At Max, the focus is on helping individuals and their financial advisors earn more on cash within their portfolios, while keeping within federal deposit-insurance limits for safety. Letting your bonus grow with interest means more money to spend later when you decide what to do with it. Learn how.

Rates Rise; Max Members Cheer

Fed Chairwoman Janet Yellen speaks at a press conference to announce the central bank's rate increase on December 14, 2016. Photo credit: Federal Reserve via Flickr.

Fed Chairwoman Janet Yellen speaks at a press conference to announce the central bank’s rate increase on December 14, 2016. Photo credit: Federal Reserve via Flickr.

Since the Federal Reserve last raised interest rates in December 2015, investors have been waiting for the central bank’s next move. Now Chairwoman Janet Yellen and her board have done what the market expected and raised rates by 25 basis points (0.25%).

Analysts expect that this will be the start of a period of increased rate volatility. In 2017, the market anticipates three to four more rate hikes, as the Fed climbs out of the near-zero rate trough that accompanied years of quantitative-easing after the 2008 global financial crisis.

Rising rates are a conundrum for investors. They bring the promise of more interest earned on new or floating-rate debt, but they also mean that investors now have to make sure their investments are earning the best rates.

Bank deposits will likely move higher now that the Fed’s rates are increasing. Investors who keep cash in the bank or in brokerage accounts should monitor their financial institutions’ rate moves to be certain their money is earning the most advantageous rate.

That’s not a problem for Max members. Max automatically reallocates cash to a member’s highest-yielding online savings accounts. Members don’t have to think about which of their banks is paying more in interest, or about whether they’ve exceeded the FDIC deposit-insurance limit on their bank deposits.

As the Fed continues to raise rates, it’s likely that the spread between the interest rates paid by brick-and-mortar banks — practically zero — and online banks will widen. Online banks, which have a lower cost structure because they don’t have branches, are likely raise their rates on savings accounts more rapidly. This also means that Max members will benefit, since Max works by optimizing members’ cash balances across online savings accounts.

In a rising interest rate environment, Max can help investors to stay current with the highest rates they can earn on their cash. Currently, Max members are earning .70% to .90% more than the national average.

We also work with financial advisors to help their clients earn more on cash in bank or brokerage accounts.

To learn more about how Max can help you, visit MaxMyInterest or MaxForAdvisors.com.

Money Market Funds: How New Rules Affect Cash

Max solves the liquidity problem that money market funds suffer under new rules taking effect in October 2016.

Max solves the liquidity problem that money market funds suffer under new rules taking effect in October 2016. CEO Gary Zimmerman explains in this video.

Money market funds once were considered equivalent to cash. No longer. Under new rules that take effect October 14, 2016, money market funds may not be liquid in periods of market stress, meaning you may not be able to access your cash when you need it most. These changes will also affect how investors and their financial advisors think about money market funds in their portfolios.

The advantage of a money market fund was that shares of these funds behaved like cash. Their value held steady at one dollar per share and investors could buy and sell them at any point. Money market funds were viewed as a safe place to park cash, while earning slightly higher returns than a bank account.

The 2008 global financial crisis showed that these funds may not always be safe. When the Reserve Primary fund “broke the buck,” watching its shares dip below $1 for the first time, it sparked investors’ fears that their cash held in money market funds might not retain its value. The funds weren’t really cash after all.

In July 2014, regulators instituted new rules that are scheduled to take effect next month. These regulations alter how money market funds trade. Now, institutional money market funds — the shares of which are held by pension funds and other large institutions — must let their share price fluctuate according to the market, as all other mutual funds do. That means the shares may not always be worth $1.00. (Retail funds, owned by individual investors, will continue to have a mandated $1 share price.)

The main effect of the new rules on individuals will be to allow money market funds to limit investor redemptions in the event of extreme market volatility, and to impose fees on redemptions in such cases. Investors who wish to sell their shares when the markets are turbulent may not be able to do so, as these funds can impose gates on redemption for 10 days.  Investors may also have to pay a fee to redeem their shares too.

If it costs extra to get your money back, and the funds can wait 10 days to return your cash to you, is a money market fund still the same as cash? Many investors and their financial advisors don’t think so. They are increasingly looking at higher-yielding, FDIC-insured savings accounts at online banks as a place to put cash to keep it safe and fully liquid.

Max can solve this problem. As an intelligent cash management service, Max automatically allocates investors’ 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% on their cash, with full FDIC insurance of up to $1.25 million per individual or $5 million per couple. By contrast, many bank or brokerage accounts pay only 0.01% or 0.02%.

Max is not a bank, nor does it provide financial advice.  Max is a technology-driven tool that automatically  helps clients spread their cash among higher-yielding online savings that they hold in their own name. Clients retain direct access to their funds, maintain their relationship with their primary checking-account bank or brokerage firm, and can continue to use all bank services like notaries and tellers. And, unlike money market funds under the new regulations, there are no gates to redemption, and no extra fees to withdraw money.

In addition to delivering a higher-yielding solution to clients, financial advisors can bring more cash into view, fostering more holistic asset allocation discussions and growing AUM.

Learn more about the Max Advisor Dashboard and how to get started with Max by visiting MaxForAdvisors.com. Or contact advisors@maxmyinterest.com with questions.

 

Questions Clients Ask Advisors About Max

High net worth households currently have 23.7% of their holdings in cash.

High net worth households currently have 23.7% of their holdings in cash.

When clients hear that they could earn more on their cash without sacrificing liquidity or giving up FDIC insurance, they are often surprised. Aren’t banks paying almost 0% in interest now?

It’s a conversation we hear frequently at Max, where we are working to help financial advisors and their clients maximize the interest they earn on cash in the bank.

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%.

Clients, and advisors, frequently have questions about how Max can accomplish this goal. Here are some real-life comments they’ve made:

 

“Please look into this opportunity to earn more interest on cash.”

“[Your financial-advisory firm] is behind the times. You guys need to establish a relationship with Max so I can earn better interest on cash.”

“Have you heard anything about this outfit? I read about them in The Economist. They claim to move funds between bank accounts to optimize interest rates. The advertising implies that they can get around 1% versus whatever bank you have is paying.”

“Any chance [your financial-advisory firm] would offer this?”

“I saw a reference to this website in the WSJ and found it to be pretty interesting. Please take a look and we can discuss when you come to Boca.”

 

The reason clients are curious about Max is that the average savings account in the U.S. pays 0.11%, with many bank or brokerage accounts paying only 0.01% or 0.02%. That means Max members are earning about 10 times as much on cash as the average, and considerably more that they earn in a brokerage account.

How does Max help clients earn more on cash? Online banks are more efficient than brick-and-mortar banks. Without retail branches, their lower cost structure allows them to pass along more yield to clients who deposit cash with them. And by optimizing clients’ cash across several online banks, Max helps keep cash within the FDIC deposit-guarantee limits.

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 (or custodial account at Fidelity or Schwab), and can continue to use all bank services like notaries and tellers.

Learn more about the Max Advisor Dashboard and how to invite clients to Max by visiting MaxForAdvisors.com. Or contact advisors@maxmyinterest.com with questions.