Brokers Bank Perks to Lure Cash Accounts
Jane J. Kim
Aug 4, 2007
Should you bank with your broker?
In a bid to grab more of their customers' cash, brokerage firms are pitching new online checking accounts that pay much higher interest rates than traditional banks do and offer other perks.
This month, Fidelity Investments plans to launch an interest-bearing account, mySmart Cash, that offers checking, debit cards and rebates on automated-teller-machine fees. It follows similar moves by Charles Schwab Corp. and E*Trade Financial Corp. earlier this year.
The new accounts differ from brokerage firms' current cash-management programs, by adding higher interest rates and ATM-fee rebates. But do these perks outweigh the hassles of switching?
Direct deposit and automatic payments have made it trickier for consumers to move their primary checking account to another firm. And although the accounts are covered by the Federal Deposit Insurance Corp., consumers would likely lose free access to their bank's network of branches and ATMs.
The answer depends in part on what kind of investor you are. Active investors can immediately put new money to work in the markets if their checking and brokerage accounts are under one roof instead of having to wait one or two days for the funds to transfer between different institutions.
And investors who are earning low rates of interest on the excess cash in their brokerage sweep accounts would be able to move that money to their higher-paying checking account. (Although they may have to take the extra step of transferring the money online or asking a representative to do it for them.) Some customers may qualify for better pricing on trading commissions or loan rates.
But the big lure is higher interest rates. Fidelity is expected to pay an annual yield of 3.5%. Schwab and E*Trade are offering 4.25% and 3.25%, respectively. By contrast, the average yield on interest-bearing checking accounts nationwide is 0.27%, according to Bankrate.com.
For many people, that alone will outweigh the downside of paying a fee to use another bank's ATM or mailing in deposits, because brokerage firms typically lack a wide network of branches and ATMs. Schwab, E*Trade and Fidelity are trying to get around that problem by reimbursing customers for any ATM fees.
Another consideration: Other cash alternatives, such as money-market mutual funds and high-yield savings accounts, are yielding more than 5%. And customers at E*Trade have to tie up at least $5,000 in average monthly balances to qualify for the 3.25% yield. (Schwab and Fidelity don't have minimums.)
The moves come as banks and brokerages increasingly try to poach each other's customers. Bank of America Corp. and Wells Fargo & Co., for example, now offer free online trades for those who meet minimum balance requirements.
Banks aren't going to let go of their accounts that easily. Over the next year, watch for banks to come out with online checking accounts that may match what the brokerage firms are now offering, says Dave Kaytes , managing director of Novantas LLC, a management-consulting firm.
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