Be Careful With Savings Products from Credit Karma, Wealthfront, Betterment and SoFi

The last few months have seen the emergence of non-bank savings products that purport to be FDIC-insured often to amounts higher than the FDIC limits that online banks are able to offer ($250,000 for individuals, $500,000 for couples).

Whereas we saw neo-banks emerge in late 2017 and early 2018 as all sorts of other non-FDIC insured products were offered, these latest products are offered by large roboadvisors and the like and target high net worth investors.

BestCashCow cannot guarantee the application of these FDIC limits, and advises they all be avoided until more clarity is provided by the institutions and by the FDIC.

The products that concern us are as follows:

1. Credit Karma Savings

Credit Karma is known for its free credit-scoring services and nuisance emails to those who register. It announced in November 2019 that it has partnered with a series of national banks to offer a competitive online savings product with FDIC insurance up to $5 million. The product has been initially offered with a starting 1.90% rate.

Our concerns: If you read the fine print, Credit Karma states that the product is offered by MVB Bank and not by Credit Karma. It also explicitly states that FDIC coverage does not apply until they move your money to one of Credit Karma’s so-called network banks and that your actual FDIC insurance limit may be lower than $5 million if they do not move it (presumably, much lower). Credit Karma would have to have at least 20 network banks to provide coverage to $5 million, and they don’t disclose who the network banks are.

2. Betterment Everyday

Betterment is a roboadvisor targeting young investors who are unable to understand simple ETFs and no load mutual funds. Its Everyday Cash Reserve program is designed to deliver a competitive savings rate for an individual up to $1 million by dividing deposits between four so-called program banks. Betterment has a list of twelve banks from which a depositor’s four program banks are selected. As of the day that this article is written, Betterment is offering 1.85%.

Our concerns: Betterment itself states that this program is intended only for cash that you are deploying in Betterment products (The SIPC covers up to $500,000 a cash that is in brokerage accounts and intended to be invested in investment products anyway). The list of program banks may include one or more that is defined as at risk by the FDIC. The full amount of your money is at risk during transfer periods and when it is not held by program banks. If you have another accounts with a program bank, your total deposits at that bank are only insured to $250,000.

3. Wealthfront Cash

Wealthfront is a more refined, California-ish version of Betterment, but equally unnecessary for investors with even the most basic investment understanding. Their savings product is similar to Betterment’s, except that their list of program banks is limited to four so you will always know where your money is deposited. You can also opt out of individual program banks if you already have deposits at that account. Wealthfront is currently offering 1.82%.

Our concerns: Our concerns about Wealthfront’s savings program mirror those we have with Betterment’s.

4. SoFi Money

SoFi is the company that advertises all over the place about helping to get millennials out of debt and recently became a broker dealer. Again, their product is similar to Betterment’s, except that their list of program banks is limited to six so you will always know where your money is deposited. SoFi Money is currently offering only 1.60%.

Our concerns: Our concerns about SoFi money mirror those above.

5. Others - Robinhood, Empower, Etc.

Robinhood, the trading app that tried earlier to offer a savings account entirely insured by the SIPC, and Empower, the financial coaching app, also offer similar savings products, but these outfits are so silly and the products are not competitive so depositors and investors should not be considering these.

Bottom Line: There is really no need to play with these. Online banks provide complete FDIC coverage up to FDIC limits with no ambiguity. To boot, there are many that still offer much higher savings rates than these companies are offering. Plus, they also offer short-term CDs with much higher rates.