Don’t be swayed by arguments that don't hold up
America’s largest retail banks want their customers to park all their cash with them. It used to be that customers would receive a somewhat reasonable interest rate, but that hasn’t been the case since the Great Recession. In exchange for low interest rates, Banks now rely on other reasons to keep cash on deposit, but the game has changed and we need to revisit what we do with our liquidity.
Don’t fall for the “safety” argument.
While it may be true that regional banks aren’t as strong as some large banks, “bank safety” is not an argument that holds up to scrutiny. The Treasury Department has proven that while it was willing to let Silicon Valley Bank fail, it didn’t let depositors suffer by ensuring all deposits above $250,000.
1. FDIC vs SIPC
The Securities Investor Protection Corporation provides insurance coverage for securities (investments) and cash held in brokerage accounts. It protects investors against the loss of their assets in the event of a firm’s insolvency.
The FDIC (Federal Deposit Insurance Corporation), on the other hand, provides insurance coverage for deposits held in banks. It primarily covers traditional banking products such as checking accounts, savings accounts, certificates of deposit (CDs), and money market accounts.
Don’t fall victim to believing only money held in FDIC-insured banks are protected.
2. “Convenience” argument; a fallacy
a. While this may have passed muster a decade ago, the fact is that with bank-linking tools, it’s easier than ever to transfer funds between accounts at different institutions in as little as one day. Creating a secure ACH link allows for easy transferring of funds through your phone.
3. Brokerage Account for Business Owners + Cash Equivalents = you winning.
We're all accustomed to thinking of cash as meaning US Dollars. Time to think beyond Dollars. Let’s talk about Cash Equivalents: In Financial Planning, cash has a very specific meaning and refers to cash equivalents and bank instruments of deposit that have a high level of liquidity. This means you have an ability to redeem an instrument quickly, at a known price and without a significant loss of principle. Some of these types of instruments are Certificates of Deposit, Negotiable CDs, Money Market Mutual Funds, Commercial Paper (short term, unsecured promissory notes issued by a big firm) US Treasury Bills (short term government securities) and Repurchase Agreements and Bankers Acceptances.
4. Why should you think about a Business Brokerage? Money. Much, much more money.
As of this publishing, the average savings rate for business deposits at the largest US Bank by deposits (Chase), range from .01% to .02%.* By contrast, Vanguard’s Federal Money Market Fund (Ticker: VMFXX) has a 7-Day SEC Yield of 5.28% (expense ratio is .11). So let’s put this into real terms: Imagine you kept $250,000 on deposit in your business savings account. In one year, the most interest you’d earn is $50.00. Cute. Now, if you kept, say 90% of your business deposits ($225,000) in Vanguard’s Federal Money Market Fund, you’d earn $11,632.5 (net of fund expenses).
By updating some thinking, you can capitalize on Jerome Powell’s rate hiking campaign by moving business deposits to a brokerage account. Not all big investment firms offer corporate brokerage accounts, but many do. It's important to understand that Money Market Funds are not the same as Deposit Accounts, but that doesn't mean you should stick with your old game plan and suffer through such low interest rates. You’ll be covered by SIPC insurance in the event of insolvency, you can easily transfer funds between accounts at outside firms and you’ll earn a much, much higher yield on your deposits.
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Past performance is no indication of future results. Investment in securities involves risk and has the potential for loss of funds invested. It should not be assumed that any recommendations made by the Author, in the future, will be profitable or equal the performance noted in this publication.