Is your Banker/Financial Planner Loyal?

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Following a mass migration of brokers from Merrill Lynch after the buyout by Bank of America, some high-ranking executives and brokers are returning. Is this an exhibition of disloyalty and conflicts of interest between brokers and you, the client?

The financial world, and banking in particular, is built on trust. An evaporation of trust, no matter how good your liquidity or credit might be, results in bankruptcy (just ask Lehman Brothers). Loyalty, however, appears to be a quality in shorter supply than Federal surpluses.

I read with disapproval recently a report in the Wall Street Journal with the following content:

“Sam Chapin and Todd Kaplan, who left Merrill Lynch & Co. amid an exodus of top investment bankers as the securities firm was sold to Bank of America Corp., are returning to their old firm, according to people familiar with the situation. The pair were among a large group of veteran investment bankers and top executives who bolted before and after the deal was completed at the start of last year.”

After the sale of Merrill Lynch to Bank of America, an entire host of financial advisors and investment banking staff left the firm. A lot of them joined rivals including Smith Barney, which was ironically also sold, to Morgan Stanley. During the darkest days at Merrill Lynch, the exits compounded the situation and left very many clients in the hands of new brokers when they would least afford it.

At the time, Merrill Lynch head John Thain was fired after spending ridiculous amounts redecorating his office. Former Merrill Lynch President Greg Fleming, who played a central role in the firm’s survival and subsequent sale, also left for Morgan Stanley. Thain, a former NYSE Chief Executive Officer, is now at CIT Group, which recently emerged from bankruptcy. His office decoration costs have yet to be disclosed.

In order to lure more brokers back to Merrill, the firm set aside $4 billion in compensation, which is apparently similar to 2006 levels. The firm has also managed to slow down the huge number of exits. It’s unclear whether or not the record high compensation had anything to do with that.

Brokers are free to move between firms and often take their clients with them. However, a broker moving from Merrill Lynch to Smith Barney is going to come under considerable pressure to change the portfolio of his client from Merrill products to those provided by Morgan Stanley. In that case there is a definite conflict of interest - the broker is chasing higher commission and compensation versus the best interests of their client.

While this is no new phenomenon when it comes to the provision of financial services and the brokerage industry in general, it’s crucial that you establish and iron out any conflicts that arise. A broker is employed by a big firm to sell you products that meet a specific need, but at the end of the day they operate out of the profit motive. Merrill is posting big profits not because they have a big client base. It’s because they have a big client base that pays them big fees. The same can be said of Smith Barney and all the other big firms that pay exorbitant bonuses based on no loyalty at all.

If you are unable to mange your own finances and require the assistance of a financial planner, always ensure that your interests are aligned with his. A classic “deal-breaker” would be to question why you have in your portfolio a security issued by his employer firm over that of another firm. It the answer is because it’s a better product, be warned – it probably pays a higher commission too!


Savings Rates At 2% - CD Rates Above 3.5% - Weekly Rate Update

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Average savings rates moved up slightly in the past week as several banks joined the BestCashCow rate tables with competitive rates. This included a non-promo savings rate at 2% APY. CD Rates held steady with the highest rating being a 5-year CD paying 3.55% APY. All rates are as of 2/22/2010.

Last week the Fed continued its policy of unwinding the unprecedented monetary stimulus by raising the Discount Rate from 0.50% to 0.75%. While the Fed made it clear this does not change its low rate policy, the move is still a sign that the Fed feels that the worst is behind us. The Discount Rate is the rate that the Fed charges banks for emergency overnight loans. Unlike the Fed Funds Rate, it has very little direct impact on savings, cd, mortgage rates, etc. offered by banks. The Federal Funds Target Rate remains pegged at 0-.25%.

Other relevant news includes data released by the Bureau of Labor Statistics which shows there is virtually 0 inflation even as the government floods the market with money. Inflation rose only .20% in January and almost all of that rise was due to energy costs. Core inflation, which strips out food and energy actually fell by .1%.

This data will provide no urgency to the Fed to raise the Federal Funds Rate. Their thesis of a slack market seems to be holding.

Looking at the Federal Funds Rate predictions chart, you can see that markets do not anticipate a rate increase through the June Fed meeting. I suspect the rate will stay pegged at 0-25% a good deal longer, and potentially through the rest of 2010.

A low Fed Funds Future rate means low rates on savings accounts, money markets, and certificates of deposit for a good deal longer.

Savings Rates

Average saving rates posted the first rise in 17 weeks. They rose from 1.45% APY to 1.46% APY. The increase was mainly due to the addition of three new banks to the rate, all offering competitive savings or money market accounts. These include:

  • Southern Community Bank offering a 2% APY savings account
  • Palladian Private Bank offering a 1.7% APY savings account
  • Colorado Federal Savings Bank offering a 1.4% APY savings account

Everbank still has the top rate with their 3-month promo of 2.25% APY for new money. After that, the new-comer Southern Community Bank is next at 2% APY. It's been awhile since we've seen a non-promo 2% APY rate for a nationally available account.

Other attractive CD rates are CNB Bank Direct at 1.50% APY and American Express Bank, FSB also at 1.50% APY.

CD Rates

The average 1-year CD rate rose by 1 basis point from 1.83% APY to 1.84% APY. The top rate continues to be 2% APY offered by Southern Commerce Bank.

The average 3-year CD rate rose by 2 basis points from 2.60% APY to 2.62% APY. The good news is that most of the rate leaders on the table remained stable. Hudson City Bank is the rate leader with a 2.8% APY 3-Year CD.

The average 5-year CD dropped for the first-time in four weeks, falling from 3.31% APY to 3.30% AP. Despite this, the top rate continues to be iGOBanking's 3.55% APY CD. Acacia Federal Savings Bank also has a competitive IRA only CD paying 3.50% APY. These top three rates have remained steady.

Both the cd spread and the savings/cd spread remain near record highs. What does that mean? It means as a depositor, you are being compensated more highly for putting your money into a longer-term deposit account then you were even a year ago. This isn't a suprise as savings rates have collapsed while longer-term CD rates have come down much more gradually.

As we discussed last week, the elevated ratio means it may be worth taking a look at a longer-term CD, especially one that doesn't have an onerous early-withdrawal penalty. You can now earn 1.5 percentage points more by opening a 5 year CD versus a 1-year CD. If interest rates stay low for the next couple of years, as is possible, then perhaps this elevated spread makes opening the account worth it.

Regardless of this analysis, CD laddering may be a good way to smooth out the return you receive from your CD portfolio. Several banks have come out with breakable CDs, that allow users to withdraw money penalty free, and still othe banks are lowering the withdrawal penalty (Huge Change to Ally Bank CDs Will Benefit Savers) for removing money before maturity.


The Fed Raises the Discount Rate to 0.75% - Not a Sign of Tightening

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The Fed today released a statement saying that it was raising the Discount Rate, the rate it charges banks for overnight loans, from .50% to 0.75%. This change was expected and the Fed was careful to point out that it still expects to keep the more influential Fed Funds rate low for some time.

Here's the statement from the Fed on how the rate change will impact consumer interest rates:

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

As this article points out, the discount rate is not as influential as the Fed Funds rate in impacting interest rates and monetary policy. Nevertheless, there was a reaction in financial markets today. The dollar spiked and stocks retreated while in bond markets, Treasury prices fell and yields moved higher. These are all typical responses to anticipated higher interest rates.


Savings Rates and CD Rates Little Changed - Weekly Rate Update

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Savings rates and CD rates were little changed from a week ago, with rates moving 1 or 2 basis points for the various products. The top rates for various cd terms and savings accounts were unchanged from a week ago. The spread between short term and longer term deposit accounts remained elevated.

Last week the Fed gave its first indication that it might start raising rates sometime in the future. Bernanke stated that the Fed may raise the Discount Rate before long. The discount rate is the rate at which banks can take emergency loans from the Fed. It is not the same as the Federal Funds rate, which is more influential in impacting interest rates. Still, it's a start.

Over the past week, the issue of sovereign government default became more prominent as Greece jockeyes for a bailout from the EU. Many believe that Greece's debt problems are just a prelude to more problems from other highly indebted nations - Spain, Ireland, Italy, Japan. And some, like Marc Faber believe that mounting debt levels could even impact the United States.

A Federal Funds Rate predictions chart would show that markets do not anticipate a rate increase through the June Fed meeting. I suspect the rate will stay pegged at 0-25% a good deal longer, and potentially through the rest of 2010.

A low Fed Funds Future rate means low rates on savings accounts, money markets, and certificates of deposit for a good deal longer.

Savings Rates

Average saving rates hit a record low again last week moving from an average rate of 1.46% APY to 1.45% APY. While the averages have come down, the highest rates on the BestCashCow rate tables have remained steady. The highest rate is the Everbank Money Market Account, which is offering a 3-month guaranteed promo rate of 2.25% APY. The 1-year APY for the account is 1.51%. Following that is Franklin Synergy with a 1.75% APY and EBSB with a 1.67% APY. Other attractive CD rates are CNB Bank Direct at 1.50% APY and American Express Bank, FSB also at 1.50% APY.

CD Rates

Both the average 1-year CD rate and the average 5-year CD rate rose slightly over the past week while the average 3-year CD rate fell slightly.

The average 1-year CD rate rose by 1 basis point from 1.82% APY to 1.83% APY. The top rate continues to be 2% APY offered by Southern Commerce Bank.

The average 3-year CD rate fell by 1 basis point from 2.61% APY to 2.60% APY. The good news is that most of the rate leaders on the table remained stable. The top 3-year CD rate continues to be 2.8% APY offered by Hudson City Bank.

The average 5-year CD rate rose from 3.29% APY to 3.31% APY. The top rate continues to be iGOBanking's 3.55% APY CD. Acacia Federal Savings Bank also has a competitive IRA only CD paying 3.50% APY. The next best 5-year rate is Everbank at 3.37% APY. This marks the third week-in-a-row that 5-year CD rates have moved up.

Both the cd spread and the savings/cd spread remain near record highs. What does that mean? It means as a depositor, you are being compensated more highly for putting your money into a longer-term deposit account then you were even a year ago. This isn't a suprise as savings rates have collapsed while longer-term CD rates have come down much more gradually.

As we discussed last week, the elevated ratio means it may be worth taking a look at a longer-term CD, especially one that doesn't have an onerous early-withdrawal penalty. You can now earn 1.5 percentage points more by opening a 5 year CD versus a 1-year CD. If interest rates stay low for the next couple of years, as is possible, then perhaps this elevated spread makes opening the account worth it.

Regardless of this analysis, CD laddering may be a good way to smooth out the return you receive from your CD portfolio. Several banks have come out with breakable CDs, that allow users to withdraw money penalty free, and still other banks are lowering the withdrawal penalty for removing money before maturity.


Marketwatch - Time for Fed to Help Savers

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Irwin Kellner, the Chief Economist or Marketwatch came out with an article today parroting what we've been saying for the last year: the Fed is punishing savers to the benefit of borrowers. The mainstream press has sporadically written articles about this but it's good to see it continuing to get attention.

Irwin Kellner, the Chief Economist or Marketwatch came out with an article today parroting what we've been saying for the last year: the Fed is punishing savers to the benefit of borrowers. The mainstream press has sporadically written articles about this but it's good to see it continuing to get attention.

In his article he writes:

"It can't come a moment too soon for the silent majority -- the nation's savers.

In its efforts to shore up the banking system, the Fed has neglected the needs of those who save. And in case you did not know it, savers make up the bulk of the population."

But are savers the silent majority? When you add up everone who has a mortgage, credit card, car payment, home equity loan, business loan, etc. I find it hard to believe that there are more savers. We run on a credit economy, not a saver's economy. That's why the outcry over low interest rates hasn't been louder. There are a lot of people who have debt or use credit and they are all benefitting in the current environment.

I know that I am. I'm a saver but I also benefitted from low rates by refinancing my mortgage.

The other question to ask is, did the Fed have any choice? Shouldn't credit be less expensive in a financial meltdown? After all, it makes no sense to raise interest rates while the economy is crumbling. The Fed is not going to keep rates at 5%. Of course rates were going to come down.

But that doesn't make it an easy pill for those loving on a fixed-income to swallow.

What can a saver do? Get smart. Look for the very best places to put money. Don't let money sit in a savings account earning 0.5% when banks are offering 1.5%. Look for the very best CD rates.  Shop around. 

If all the talk about inflation is correct, then savers may soon see their fortunes reversed, as rates climb quickly.


Opening A Savings Account to Use As An Emergency Fund

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An emergency fund is a great way to help yourself stay out of debt. But what can you do in this economy to save money for your emergency fund?

An emergency fund is an ideal way to keep yourself out of debt. Many times, people use their credit cards when an emergency arises and then they continue to use them until they can barely make the minimum payments. As a result, they go deeper and deeper into debt simply because they used their credit card for an emergency. Here are some strategies for building your emergency fund and staying out of debt.

Start Now
The best way to start building an emergency fund is to start right away. You don’t have to wait until you get a windfall of money to begin an emergency fund. You can start just by taking a sandwich to work every day instead of going out to lunch all the time. You could save $20 or $30 each week by doing that and putting that money into your emergency fund. At the end of the month, you could have more than $100 in the fun. That’s enough to cover some emergencies even without a credit card!

Make Some Cuts
There are always things you can cut out from your budget to save money. Do you really need all those movie channels? Do you have to buy the DVD of a movie when it comes out instead of renting it? Do you have to go to Starbucks every day before work? Take a look at your spending habits and the luxuries you pay for and see what you can cut out and put towards your emergency fund. You might even find out that you don’t even miss those things after a couple weeks.

Keep Your $5 Bills
You have probably heard of Bank of America’s Keep the Change program. This concept uses the same idea but on a larger scale. When you use cash, keep any $5 bills that you have. When you get change at the gas station or wherever, take any $5 bills and set them aside for your emergency fund. Or, if you can afford it, do $10 bills instead. You will be amazed at how much you will save in just a couple months.

Set Aside Half of All Extra Money
If you get a bonus or some extra money for whatever reason, but at least half of it aside for your emergency fund. After all, this is money you didn’t plan on having in the first place so it should be no sacrifice using it for your emergency fund.

Saving for an emergency fund may give you less spending money in the immediate future, but it will save you hundreds or even thousands of dollars in interest in the long run. Instead of paying for your emergency with a credit card along with all the interest that accrues, you can simply pay for the situation with cash and be done with it for good. It’s a good financial habit to get into, but it takes some work and motivation to get started.