Millions of investors have parked their cash in brokerage sweep accounts. In most cases, this is a bad idea.
As stock markets have crashed, millions of investors are holding a significant percent of their portfolio in their brokerage sweep accounts. While this is good for financial companies, it's terrible for investors. Sweep accounts offer rates of return as low as .01%. For banks, the accounts are a bonanza. They reinvest the money parked in these accounts at significantly higher rates, earning billions per year.
So, how do you make sure that you get a decent rate of return instead of funding your bank?
Move the money out of your brokerage account temporarily until you are ready to reinvest. High yield savings and money market accounts on the BestCashCow rate table pay above 3% APY. If you want to park significantly more than the FDIC limit of $250,000 per person per bank, then you may want to consider a CDARS program.
The disadvantage of getting these higher rates is that you'll have to move the money out of your brokerage and it can take 3-4 business days or longer to move the cash back in. If you don't need immediate access to your money, it's not a problem. But if you want to be able to transfer and trade, the time limit might be a drawback.
A solution to the access problem is to look for a companion savings account with your broker. Online stock brokers like Etrade and Charles Schwab offer relatively high savings accounts that provide ffast and easy transfer between brokerage and bank. Etrade is currently paying 1.95% APY while Schwab is paying 2% APY. BankDeals has a good review of the Schwab High Yield Investor Savings. Be sure to ask your broker about higher yielding options
Sweep accounts were never meant to be a place to park money for long periods of time. Your broker has no incentive to suggest you move your money elsewhere but if you ask they should be able to provide a better option. If they don't, at least you now know there are higher yielding places to invest your cash.
There were two more bank failures last Friday - Security Savings Bank of Henderson, NV and Heritage Community Bank of Glenwood, IL. These bank closings are the 15th and 16th bank failures for the year.
There were two more bank failures last Friday - Security Savings Bank and Heritage Community Bank. These bank closings are the 15th and 16th bank failures for the year. As has been the case with other bank failures this year, the FDIC has faciliated the transfer of deposits to another bank. That means that all regular deposits, even those above FDIC limits are being made whole. The only exception are brokered deposits. These will be held by the FDIC and its probably that brokered deposits over FDIC limits will be lost. This also seems to be an emerging pattern. If you have money brokered deposits you'd be wise to make sure the amounts are under FDIC limits for each institution in which the funds are invested.
Details of each bank failure are:
Security Savings Bank, Henderson, NV
Assets: $283.3 million
Deposits: $175.2 million
Purchasing Bank: Bank of Nevada, Las Vegas
Cost to FDIC: $59.1 million
Customer Access: Over the weekend, depositors of Security Savings Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
Heritage Community Bank, Glenwood, IL
Assets: $232 million
Deposits: $218.6 million
Purchasing Bank: MB Financial Bank, N.A., Chicago, Illinois
Cost to FDIC: $41.6 million
Customer Access: Over the weekend, depositors of Heritage Community Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As we've seen with ever bank closing this year, the closing happens on a Friday, and customers retain access to funds over the weekend via ATMs and checks. The following the Monday the transitiont to the new owners have been made and funds can be withdrawn normally. FDIC insurance continues to operate smoothly.
"FDIC staff members at a board meeting today in Washington will recommend charging banks an “emergency special assessment” in response to an estimate that bank failures could cost the fund $65 billion through 2013, according to a memo outlining the proposal. The added fees are projected to generate $27 billion this year, compared with the $3 billion raised in 2008, the FDIC said"
The FDIC insurance fund has fallen from $34.6 billion in the third quarter of 2008 to $18.9 billion in the last three months. That's not going to cover all of the anticipated bank failures.
The emergency fee would be $.20 per $100 in insured deposits. The FDIC is also considering changing the amount it assesses on a regular basis from $.07 per $100 in deposits to $.12 to $.14 per $100 deposits.
Banks are charged for FDIC insurance on a quarterly basis and their rate depends on their risk weighing, which takes into effect their capital, their funding sources, and their assets. The size of the bank and the score they receive on this risk assessment determine how much is required to be paid in.
To put the fee into perspective, a medium sized bank with $1 billion in deposits would pay an additional $2,000,000 per year because of this assessment. That's not an insignificant amount and is one more demonstration of why the financial system is in for a rough time. The losses we are experiencing today are going to have an impact on bank profitability well into the future.
Whie this is bad news for bank shareholders, it is a positive to depositors and the general, who can rest easy knowing the insurance fund that backs their account will remain solvent without government support - for now.
