WSJ Article Mistakenly Celebrates Bank of America's Low Interest Rate

There was an interesting article in the Wall Street Journal yesterday, entitled "Bank of America Pays Peanuts for Deposits but the Money Keeps Flowing In".

The article highlights, actually celebrates, the fact that Bank of America in 2016 paid only $617 million for $796 billion in US interest-bearing deposits.  In other words, Bank of America paid 0.08% in interest to its deposit customers in 2016.  It also points out that customers of Bank of America could have made almost twice as much in interest had they moved their money to Chase, and many multiples had they held their money in Goldman in 2016.

In its effort to try to explain why so much money is still held in low or no yielding deposit accounts, the WSJ authors proceed to highlight the branch network and technology as the reasons why young people choose to keep their money in these accounts.  In particular, the article refers to the experience of a woman in her mid-30s who finds Chase’s mobile technology and ATM network to be her reason for sticking with them.

Chase’s mobile technology is in fact outstanding (Bank of America’s is not), but so to are the mobile apps of some online banks (Ally, for one, has an excellent mobile app).   More importantly, if you require access to a mobile app or a branch network or great international wire transfer functionality, you can get all of these services through Chase or Citibank or Bank of America or Wells Fargo without fees by maintaining an account with balances of only $15,000.

Your cash above that amount should always be in a higher earning interest accounts.  Higher earning savings accounts can be online only.  Smaller, lesser known banks and credit unions in your area may also pay higher rates.  If you do not need the money right away, you should also consider CDs.

Towards the end of the article, the authors seem to determine that part of the reason that people don’t move to higher yielding accounts is that they really don’t have that much money to move.  However, BestCashCow’s Savings and CD Calculator demonstrates how even a small amount of money can compound significantly more quickly over a relatively short period of time when moved from a low yielding savings account to higher yielding ones.

I am tired of hearing people – young and old - explain to me that it isn’t worthwhile to seek a higher earning interest account.  I am disappointed to see an article celebrate it.    The reality is that the fact that some of the major brick and mortar banks can pay so little in interest while online banks, credit unions and even other local banks are offering so much is due in large part not just to apathy, but also to asymmetrical information.  Just 3 minutes with the calculator will show you how important it is for your future and that of your heirs to move your cash to a higher rate. 


Opening Your First Online Savings Account: 10 Factors to Consider

I continue to be surprised by the number of people – well educated people, in fact – that I come across in my daily routine who tell me that they have not yet opened their first online savings account.

Nobody disputes the fact that a savings account is, at the very least, an important, safe way to keep cash available.   Even if you are entirely long of asset classes other than cash (equity, bonds, commodities, real estate, etc.), you need also to have a place to put your savings.   A standard savings account is going to earn a scant amount of interest and, when factoring in inflation, could actually lose money for depositors over time.

Especially when you take account of the value of compounded interest over time, higher yielding online savings accounts will outperform standard accounts.  You can experiment with the numbers yourself on BestCashCow’s savings and CD calculator.  I even hear a refrain from people who have millions of dollars in low interest earning accounts that they just don’t have the time to focus on chasing higher yields when the difference is at most 1%.

The most important thing to consider is that it really doesn’t take much time or effort at all to open a higher yielding savings account than one at a major money center bank, and it doesn’t involve any risk.

Higher yielding savings accounts offer the same FDIC coverage as brick and mortar banks (which is similar to NCUA insurance for credit unions).  Just stay within FDIC (and NCUA) insurance limits at every bank where you bank.  As a basic rule of thumb, your funds at each banks are insured by the FDIC up to $250,000.  If you open an account through a credit union that is insured by the NCUA, your money is secured up to $250,000 through the National Credit Union Share Insurance Fund (NCUSIF).    Learn more about FDIC and NCUA insurance here.

While online accounts are ordinarily very easy to open and can be done from your own home, it goes without saying that the higher yield savings accounts available to you may actually still come from a brick and mortar bank.  Check those rates where you live here and check credit unions here.

What to Consider Before Opening Your First Online Savings Account

Before opening an account anywhere, think about the following 10 factors:

1. Required Initial Deposit: How much money do you have to deposit to open the account?   The five major online banks (CIT, Synchrony, Goldman Sachs, Ally and Barclays) ordinarily do not have minimum deposit requirements for the savings products.    Others do, but it is always clearly stated on the BestCashCow rate tables.

2.  Minimum Balance Required: How much money are you required to keep in the account to earn the advertised rate of interest and to avoid the assessment of account maintenance fees?  Most major online banks do not have minimum balance requirements to get their best rates.  Synchrony is the exception to this rule, as they require that you keep $30 on deposit in order to avoid a $5 monthly fee.  Where a bank has multiple tiered rates (also, known as graduated rates), BestCashCow's tables list only the highest rate.

3.  Rate of Interest Paid (APY): How much interest will you earn on your deposits and how long will that interest rate last? Is it an "introductory" rate that changes at a certain point or is it the permanent rate?   BestCashCow does list rates that are only offered to new depositors or for new money, but does not list so-called introductory and gimmicky rates, such as those offered by EverBank or some of the local Massachusetts banks.  Rates are always subject to change and can go up and down without notice.   If you seek to lock in rates or require certainty that the rate will not fall over a given period of time, you should consider CDs.  The tradeoff with CDs however is that your rate ordinarily cannot rise during the course of term (except so-called “raise your rate” or “step up CDs” offered by CIT or Ally).  Here is a good primer from which to start learning about CDs or you can download our CD Ebook from the EBook section.

4.  Application/Account Set-Up and Maintenance Fee: How much does the bank or credit union charge you to apply for and/or set up the new account? Is there an ongoing monthly, quarterly or annual fee to keep account privileges?   Again, the major online banks do not charge set-up and maintenance fees, and you should avoid any bank or credit union that charges set-up or maintenance fees.

5.  Links to Other Bank and/or Brokerage Accounts and the Speed of Transfers: Does the account allow you to create links between your funds in the new account and other banks and brokerages so that you can easily transfer money in and out of the account?  All online banks have transfers down pretty well, but there are differences in ACH transfer speeds.  Goldman Sachs is known to offer immediate ACH transfers, whereas outbound transfers from Synchrony can take days.  If you are concerned about transfer speeds, you may want to read reviews of online banks accessible from BestCashCow’s rate tables before opening an account.

6.  Required Additional Accounts: Does the bank require that you open or hold an additional account, such as a checking account, in order to open the savings account or to access/withdraw funds from the account? Wells Fargo, of course, became famous (or infamous) in 2016 for forcing account holders to open multiple accounts with multiple fee structures.  The major online banks do not require you to open multiple accounts, except HSBC Direct where the Online Savings Account has a matching Online Payment account that does not earn interest and which you must use to withdraw funds. 

7.  Compounding Method: How is the interest compounded and calculated on your savings - daily, monthly, quarterly, semiannually or annually?  We view this as a red herring; it doesn’t really matter how often your money is compounding.  Banks are required to report an APY rate, which standardizes measurement of the interest that you earn regardless of the compounding method.

8. Handling Deposits. This is especially important to know if you are opening an account with an online bank. How will you be able to make deposits into the account - by direct deposit, by wire transfer, or by ACH transfer.   Can you have your paycheck deposited directly from your employer's account?   Does the bank have a good mobile deposit application? 

9. Accessing Funds: What options are available to withdraw funds? Can you write checks against the account? Transfer funds electronically?  Can you use another bank's ATMs? Use an ATM and, if so, through what ATM network and at what cost?

10. Number of Transactions Permitted. Is there a limit on the number of times you can withdraw or transfer money out of the account each month?   Some banks, including some major online banks, limit you to six transactions per account statement cycle (usually, per month).

Whether you view cash as an important part of your investment portfolio or simply need to keep small amounts liquid, high yielding savings accounts can protect your cash from a loss of real purchasing power to inflation over time.   


The Totalitarian Reign of the Airlines

Like many other things in the United States these days, the familiar has become less predictable and the veneer of civility far less true.

Airlines have become, clearly, a flashing red light about a crumbling civil society and a rising totalitarian state.

In fact, they had already torn at the country’s fabric well before Trump captured the presidency. 

After years of adding one new rule and attendant new cost after another, for services previously included in their single fare, they seem to be sufficiently emboldened to hit new lows and to charge more and more for less and less.  It does not seem far-fetched soon to expect coin operated toilet paper dispensers in the washrooms.  

But the legion of new costs and rules are far less disturbing than the mindset that has clearly set in in the corporate offices of each and every carrier.  That mindset of total distain and disregard for passengers now permeates all that they do in setting policy and in their behavior toward passengers.

And, most alarming, is that passengers sheepishly accept it all like lambs in pasture.

United’s recent and shocking behavior toward a passenger in Chicago who refused to give up his seat for an employee was over the top.  The thugs they sent aboard to attack and force him off the plane made great television, but their total disregard for common human dignity was absolutely in keeping with their modus operandi today.

The Chicago incident had, decidedly, the feel of Nazi Germany.  And, the indignity of what happened then for one passenger is repeated daily in lots of ways for many others at the time of booking, waiting to board, and on board.

Enjoying their power, they have for some time displayed their distain and disregard by forcing those who pay less to board only after all those who either paid more or who were frequent flyers.  We have all come to accept the indignities of standing by while the “rich and powerful” board.

Delta, United and now American Airlines have managed, quietly, to introduce a still more ugly way to express their distain for the majority of paying customers. 

Delta especially is providing a singularly horrifying visual as well as a decidedly new intimidation strategy.  Today, in many airports, it has added numbered or lettered columns behind which passengers must line up in rows before boarding.  It is visually an exceedingly ugly reminder of Nazi concentration camps where new arrivals would be forced to line up by age, gender, and physical attributes before a few were allowed to live and the majority marched off to their deaths.  It is a reminder not lost, I am sure, on Delta’s management and certainly effective in further dehumanizing its passengers. 

I would argue, in fact, that the addition of these lines dividing passengers along a continuum of elite to poor slobs is even more despicable than what was done to one passenger by United.  And, I am sure that it will not be long before all airlines adopt “lines” and even add a new line, probably out near the bathrooms, for fat people, poorly dressed people, people with colds, and people with funny names.


As Market Hits Extraordinary Highs, Money Managers Appear Shell Shocked

I found myself watching Consuelo Mack’s Wealthtrack show this morning.   Money managers are virtually all tremendously underperforming the Dow, the S&P and the Nasdaq.    The wealth managers on Mack’s program and programs like look out-and-out shell shocked.  You can see the same thing virtually any time of day on CNBC or on Fox Business where the message is the same, albeit less polished and full of screaming. 

Quite simply, these active managers cannot explain why they have so dramatically underperformed.  They are trying to market themselves as about to outperform equity markets, even when at 18x future earnings, just being long the market has become dramatically more risky going forward.   Money managers are so under the gun that they are resorting to positions that rely on tenuous arguments, such as the one often voiced that investors now need more exposure to US small caps.  They try to ignore the fact that small cap have also moved dramatically higher and bear risk equal to, or greater than, the broader market.  They also are playing in emerging market stocks, even though most US managers lack even a cursory knowledge of these areas and a prudent investor would avoid large exposure to emerging markets now more than ever.

Yes, a few money managers will make good calls that will cause their active portfolios to outperform the market over short or medium terms.  One or two have already been heavily and continuously exposed to Facebook, Amazon, Netflix and Google over the last several months and years and, thus, dramatically outperformed the market.   

Most advisors, however, will not have made the right calls.  For every manager who has invested well over the last couple of years, there is one who has bet during that time on Twitter, Tripadvisor, Verizon and CenturyLink.  Some have even made tremendously bad trades, like Bill Ackman’s trade on Valeant (or JP Penney beforehand) and doubled or tripled down.  While Ackman managed to avoid doing tremendous damage to his portfolio by countering these bets with a handful of good bets, many who are less talented will turn the super wealth into the merely wealthy and the wealthy into poor.

Money managers charge fees (and pass on transaction fees and costs) that, when compounded over any length of time, guarantee not only their own wealth accumulation, but underperformance for their clients.   Too boot, there are very few managers who are savvy as to tax implications of their transactions for their customers.   Even in a dramatically higher market like we are experiencing today, they might as well ask: “Together with our underperformance, can we interest you in a heavy tax burden and outlandish, recurring fees?”

Given that the market has performed so well for anyone using low cost index funds (and even roboadvisors), now more than ever, active manager are struggling to explain their underperformance (or, even their losses!).

Some will no doubt outperform in the years to come, but you will secure your future and your wealth by turning off Wealthtrack, CNBC and these other shows and avoiding their follies.

My advice is to stick with index funds to the extent that you require exposure to the stock market over the next year or two. 


Fear In America

Before the election, some people worried out loud about our new President’s ability to steer with a steady hand.  There were few who had the courage to speak out then, and their impact small. 

Today, there are even fewer.  And, that is not because the President has assuaged anyone’s concerns.  Quite the contrary.  Today, there is even greater fear on the part of many that this President could easily create a major incident that could threaten our country, the world, our very existence.

Throughout, America’s psychiatrists have been particularly silent.  At a conference held at Yale Medical School recently, however, mental health experts came together finally to weigh their role in warning the public about the dangers posed by this President.  It was surprising that the meeting took so long to happen, given the potential import of their professional judgment.  But happen, it finally did.  And, the outcomes were even more alarming, not so much for what they discussed, but for what they were unwilling to say.

A number did speak up, arguing that the symptoms were visible to all, professionals and the least informed; that it was the duty of mental health professionals to warn the public of very real danger.  But not all spoke up.  A good many hid behind an outmoded Goldwater Rule, insisting that they could not speak out.

But, what was most pronounced at the meeting was fear itself.  Fear of speaking the truth.  Fear that the President is now so powerful and that he can and has already been ruthless to those who dared to speak out against him. 

And, so the silence is even louder today.  Psychiatrists who have never been very bold are cowering even more today.  They have let us all down, worried most about their own hides, they are unwilling to share their informed assessment of the seriousness of the President’s illness. Gripped by fear, they are letting the country and the world down, standing by in silence for fear of retribution.

That’s what happens in situations like this.  That’s what happened in Nazi Germany: fear took complete hold and silence reigned.  


Who is Managing The Store?

A couple of days ago, as North Korea was parading it’s latest missiles, Donald Trump announced that he had sent “an armada” to the Sea of Japan as a clear signal that “we are strong” and “not to be played with.”  Others in the government described it as a large strike force (the Carl Vinson and three other warships) steaming to positions in striking distance of North Korea.  Coverage of all this was widespread in the country and throughout the world.  Some cheered at its boldness, some worried about what it might mean, and many prayed.

The press pushed for more from the Secretary of Defense, the National Security Advisor, and the Press Secretary.  All sang from the same music sheet and all confirmed the story, adding useless detail.

The only problem was that it was a story and not true.  The “armada” was nowhere near the Sea of Japan.   Indeed, there was no American war ship or even row boat in striking distance of North Korea.  Instead, the Vinson was and always had been off the coast of Indonesia, thousands of miles from the Korean Peninsula.  The President’s strike force had been streaming south, not north the entire time.

This is, of course, not very funny.  In fact, there is no comparable example of anything like this throughout American history.  Never before had an American President made a public statement of this kind, only to learn later that it was a total fabrication.  It is mind numbing to think that the President and his people could have been so wrong or, worse, could have been playing so carelessly with its credibility and with a very dangerous and rogue nation. 

How we, as a nation and world power, recover from this is hard to see.  Clearly friend and foe alike will wonder about the next and the next pronouncement from the American government.  This event has caused nothing short of a major erosion of confidence in America and the credibility of it leaders.