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!

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.

Palladian Private Bank, a division of The PrivateBank and Trust Co. is offering a very competitive 1.70% APY savings account rate. That's one of the best savings account rates according to the BestCashCow rate tables. The bank is also offering a competitive 1-year CD that pays 1.90% APY.

Details of the offer include:

• Available nationally
• Minimum deposit of $10,000
• Account can be opened online and funded via ACH from another online account
• CD APY is effective for 14 calendar days from the date on which the application is receiced.
• No POD beneficiaries

Palladian's parent, the PrivateBank was founded in 1989 and has approximately 800 employees. PrivateBank has $12.1 billion in assets and 3/12 out of 5 stars according to Bauer Financial for its safety and soundness.

As a note, Palladian Private Bank seems a bit well, private. There is no mention of it on the PrivateBank website. I did call PrivateBank to confirm that Palladian Private Bank is a legit subsidiary.