Banking Solutions for HNY Digital Natives

The following is an analysis for a very specific archetype of person banking needs. This person is high net worth but not ultra-wealthy. Let’s say a net worth between $500k and $20 million. Those below or above may still benefit from some of this info, but they may find other solutions will better fit their needs.

First, we are going to presume that most of your money is held in investments but you still need to have a significant cash holding for day to day needs, emergency funds and risk allocation. We are also going to presume that ideally you want to minimize the number of financial institutions in use.

I am not going to focus too much on high yield savings accounts that not offered in conjunction with other banking products. If you need this, it is easy to find whom offers the highest rate and chase yield. In 2019, your brokerage account may be able to offer you a government-backed money market account at an equal or greater rate at a similar risk level.

Note that many HNW individuals use short-term municipal bonds funds for their short-term savings due to their tax benefits. Personally, I don’t find the tax adjusted yield to be high enough to take on their actual risk (many municipalities have some real long-term risks related to their pension liabilities and their insurance companies are subject to systematic risk of this problem). As such, I am focused primarily on FDIC insured or federal government-backed money market funds. For the tax adjustment, I am assuming that your state tax rate is 5%.

First, let’s look at some of the obvious places you may hold your money. I am going to assume that you are going to be using an allocation of index funds/etfs, an internally balanced fund/etf or a low cost advisory service as that is what most people in this category should be doing in my opinion.

• Fidelity
  • $0 equity trades, $75 per trade of Vanguard Mutual Funds*, poor advisory options (robo advisor locks you to fidelity in a taxable account and regular advisory is way too expensive), free index funds if you are willing to do the allocating yourself. Good cash management options.
  • “Savings Account” Rates - Fidelity charges significant fees to its money market funds making them a poor choice for use as a “savings account” vs competitors such as vanguard. However, you can fix this with an ETF fund like CLTL (8bp fee, 4 month duration, 100% treasuries), BIL (14bp fee, 1 month duration, 100% treasuries), or, if you want a tad of risk, BSV (7bp fee, ~3yr duration, 2/3rd govt, 1/3rd investment grade).
  • Checking Account rates - While a bad savings account rate, Fidelity’s money market funds provide a great checking account rate. SPAXX (42bp fee, 1 month duration, 100% government) yield changes day-to-day but should average about 25bps lower than BIL. This compares to local bank checking account which could have an imputed fee of 100 to 200bps (comparing the yields over the past few years of a risk-free 1 month treasury to a risk-free checking account to impute the fee you are effectively paying). The expense ratio is very high for use as a savings account, but cheap for a checking account. Note that they also have a “cash management account” with a 0.75% FDIC rate. This may make sense for certainly people with lower net worths, but there is no reason to use this account if you qualify for private client status. Note that private client status appears to be sticky, once you get it, you can remove your money and keep it.
  • ATM - Fidelity provides an ATM card. If you are either private client status or using the cash management account, Fidelity’s ATM card reimburses competitor ATM fees. However, they charge 1% on all foreign transactions. Great ATM card domestically, but consider something else or in addition if you travel a lot overseas.
  • Phone Deposits - Varies by person, but I have seen limits as high as $500k per day for phone app deposits
  • Branches - Fidelity has branches in most major US cities. The main time you would use their branch is if you want to move securities away from fidelity as they often require medallion signature guarantees to do by mail which are hard to get, especially when involving large numbers. Instead, you can go to a fidelity branch where they can try to talk you out of it.
• Vanguard
  • $0 etf and equity trades and free trades of Vanguard Mutual Funds. They also offer a personal advisory services with an overlay fee of 25bps scaling down to 15bps for amounts above $5MM (and further price breaks for very large accounts). This is in addition to the underlying index fund fees that average around 7bps, so you are looking about 32bps for accounts below $5MM. This would only be worth it to me if you had large amounts in your taxable account where you needed to engage in more advanced strategies or you needed some hand holding. If you have most of your money in IRAs, I would stick with the Life Strategy funds as they are much cheaper.
  • “Savings Account” Rates - Federal Money Market (VMFXX) (11bp fee, 2 month duration, 100% government) is basically the highest yield you can find for 2 month or less duration. It is certainly better than Fidelity’s SPAXX in all ways except that it can’t be used effectively as a day-to-day checking account. Note that it is better than Schwab’s higher rate money funds as it is the settlement account that is available same day, not a fund that you can’t access until the next day.
  • Checking Account Rates - Vanguard doesn’t provide a day-to-day checking option as their minimum check size is $250. You will need to have another bank if you invest at Vanguard.
  • ATM - Vanguard doesn’t provide ATM cards. ou will need to have another bank if you invest at Vanguard.
  • Phone Deposits - $50k per trading day limit for HYW ($10k for others). $250k limit for IRA rollover checks.
  • Branches - NONE!
• Charles Schwab
  • $0 commissions for stocks and ETFs. $0 for schwab and affiliated mutual funds. Up to $50 to buy and $0 to sell other mutual funds (better deal than fidelity whom also charges for a sale). Schwab has a robo advisor with a free overlay but forces your required cash portion into low interest account.
  • Savings Account Rates - For next trading day access, SNVXX (35bp expense, 1.5 month duration, 100% treasuries) is a tad better than Fidelity’s fund but much worse than Vanguard or the best short-term ETFs
  • Checking Account Rates - Schwab pays 0.15% (as of 1/15/2020) which is well below Fidelity.
  • ATM - Schwab has the best ATM card of the big brokerages as it reimburses all ATM fees as does not charge a foreign transaction fee. If you don’t mind having a lot of accounts, may be worth having a Schwab account solely for international ATM use.
  • Branches - Schwab has branches in most major US cities.
  • Thoughts - Schwab seems to make their money on your cash balances.
• Betterment
  • robo advisor: charges a 25bp overlay to underlying low cost etfs or 15bps for amounts over $2MM. This is only a tad cheaper than Vanguard personal advisor service for accounts between $2MM and $10-ishMM and more expensive for very high net worth. The allocations they use are a bit more advanced than Vanguard, but not clear if that actually helps.
  • personal advisor: charges a 40bp overlay to underlying low cost etfs or 30bps for amounts over $2MM. This is much expensive than Vangaurd with no discernable benefit.

Online Banks

• Capital One 360
  • Savings Account Rate 1.70% (as of 1/20/20) with no minimum balance. Remember that this is state taxable unlike a government money fund.
  • Checking Account Rate 0.20% (as of 1/20/20). You only need to put a small amount in the checking account since you can have the savings account automatically transfer upon an overdraft for free (still need to leave something in the checking as can only transfer from savings 6x per month).
  • ATM - charges at 0% foreign transaction fee. No fees at Capital one nor Allpoint ATMs. Capital One is very unclear about ATM fee reimbursements. It says that SOME accounts can get up to $15 per month in reimbursements but doesn’t say which accounts.
  • Thoughts -
• Ally
  • Savings Account Rate 1.60% (as of 1/20/20) with no minimum balance. Remember that this is state taxable unlike a government money fund.
  • Checking Account Rate - 0.10%. It goes up to 50bps if you keep $15k in there every day, however, I would recommend instead to keep a smaller buffer in the checking account and put it in the savings then allow for your savings to fund the checking upon an overdraft for free (still need to leave something in the checking as can only transfer from savings 6x per month)
  • ATM - charges at 1% foreign transaction fee so not great if using internationally. No fees at Allpoint ATMs. Reimburses up to $10 per month in US ATM fees at non-Allpoint locations.
• TD Bank
  • I’ve included TD since I happen to have accounts with them and they have a good ATM card
  • ATM - TD does not charge foreign transaction fees. if you maintain $2,500 balance for the entire month, you get ATM fees reimbursed and no TD fee. Note that leaving $3k with TD to provide you with $500 to withdraw internationally would cost about $48 per year (pre-tax), compared with leaving those funds in a high yield savings account. Unless you travel a lot, this may not be worth it unless you have another reason to have a local bank account.
  • Branches - lots of branches in certain states (though a lot less than market leaders such as Bank of America) and known for extended banking hours
  • Thoughts - it is a good quality ATM card (not needed if you also have Schwab) and provides a local bank if you ever need it for something (cashing in paper savings bonds, getting a certified check same day, etc.). It also has some reasonable small business banking options. I keep a small account with them for legacy reasons mostly. Not sure if I will keep it long term or not.

Some good combinations

• Fidelity Only
  • For a static large account, you could invest in a vanguard life strategy fund
  • For active accounts, you could invest in the Fidelity Four in One fund (it is pretty cheap, but only has one allocation option, certainly a reasonable choice early in your career as a single fund play)
  • If you want to do the allocation work yourself, you could pay 0 basis points and use fidelity zero funds maybe combined with some low fee Vanguard etf’s if needed.
  • Get a great rate on your checking account and a good rate on savings through CLTL
• Vanguard + Capital One 360
  • Use vanguard life strategy at 11bp to 14bp or personal advisor services at <= ~32bps all-in
  • Strong savings rate (note that it takes some days to move to your bank account, so not for short-term emergencies)
  • Use capital one checking account at 20bps for checking needs, no need to keep a large balance in checking, no more than a typical monthly spend.
  • Use capital one savings account for short-term savings / emergency needs
  • ATM can come from either Capital One checking or savings with no foreign currency fees.
• Vanguard + Fidelity
  • Vanguard for investments and fidelity for cash management (see Vanguard + Capital One)
  • Benefits over Vanguard+Capital One is the ability to deposit large checks and to simplify life by keeping more in your checking account as its rate isn’t terrible. Downside is foreign transaction fees on ATM.

Of course, there are sometimes bonus offers that will have you temporarily move money elsewhere such as when Chase offered 60k ultimate reward points to move $75k to them (which could be invested in CLTL at a full yield) or when years ago fidelity would offer AA/United points. Right now BankDirect offers 60,000 AA points per year for $50,000 in a checking account. This was a great deal when rates were lower, but now you are forgoing almost $1,000 pre-tax (let’s call that $650 after tax), so you are buying miles at about 1.3c each (at bit less if you are in the top bracket). Not a terrible deal but not amazing either. Does ensure that you don’t lose your miles due to non-use, however.

* I mention Vanguard Mutual Funds as they have “Life Strategy” funds that are some of the cheapest ways to automatically invest. They charge between 11 and 14 basis points all-in (i.e., including the allocation fund and the underlying funds) and allow you to invest in a single fund for you full allocation. They have 4 allocation levels (stocks vs bonds), Income (20%/80%), Conservative (40%/60%), Moderate (60%/40%) and Growth (80%/20%). They also have target date retirement funds that automatically become more conservative over time, but I personally would prefer to manage my risk level myself. Fidelity has a single version of this call the Fidelity Four In One (FFNOX) fund (85%/15%) with an 11 basis point all-in fee.

** CLTL (Invesco Treasury Collateral ETF) - Bid/ask to mid spread 1bp, duration ~ 150 days, almost fully backed by US Treasuries with an expense ratio of 8bps. This is almost as low risk as VMFXX and only a tad riskier than an FDIC account. This is a good medium term savings account, but you don’t want to be constantly moving money in and out of it as it will cost you 1bp in spread each time.

1/20/2020 Yield Analysis

• 1 month raw treasury 1.53% (risk equivalent of bank account)
• CLTL fee 8bps - 1.45% after fee, grossed up for state taxes = 1.53%
• Vanguard fee 11bps - 1.42% after fee, grossed up for state taxes = 1.49%
• Capital One Savings 1.70%
• So as of right now, Capital One is slightly better than money markets up to the FDIC limit, however, this can easily shift from month to month.