Published March 8th, 2019 by Ryan Krueger
This is a guest contribution by Ryan Krueger of investment advisory firm Krueger & Catalano. You can follow Ryan on Twitter @RyanKruegerROI.
There were ten security cameras perched above the bank teller’s window. A customer in a black coat walked up to the only banker left in the building, late on a rainy Friday. The banker was startled to see somebody in that lobby (or maybe nervous about those cameras being counted). Then, it happened. The question she feared the most….
She immediately began shaking her head NO as he asked, “What is the current savings account interest rate?” She waved her arms back and forth as if to say PLEASE NO.
No exaggeration. Since that sounds too ridiculous to be true, I went back three more times before writing this, and asked three different bankers that same dreaded question. The number that each banker had to get help finding was 0.04%. Finally, the branch manager came over and I asked one final question, given the difficulty of the first one – don’t a lot of your customers want to know what their savings rate is? “Never,” she replied.
“Money often costs too much.”
-Ralph Waldo Emerson
The manager asked me as I walked out, “Why are you taking a photo of the suckers, sir?”
Going to the bank when I was a kid was very different. It was a big deal. Not because we had very much money to check on, but because I loved grabbing one orange sucker in the bowl next to the banker. I would unwrap that treat while my mom filled out a deposit slip to make sure “these dollars have to work as hard for us as we did for them, son.”
Earning interest in our little savings account was a big deal to my parents. Interest rate numbers were prominently displayed in an immaculate lobby with friendly bankers dressed in nice suits, scurrying around with an answer to every question I ever eavesdropped in on. As a kid, it was the smartest and most sophisticated office I stepped foot in.
Trusting a small local bank made good sense, and the respect was mutual. The bank wanted to take great care of your deposits so you would give them more. They were glad to pay you a healthy savings rate so they could use your money to buy risk-free bonds at higher interest rates and take risk with the rest loaning it at much higher rates.
I wonder how parents describe their savings account today. Many of their accounts are held at publicly traded global bank/brokerage firms. They never really understood how those cash accounts work. But, for an entire generation none of this has mattered much since interest rates were so low.
Until now.
A knee-to-knee meeting with a banker to explain exactly how all (or ANY) of this works has been replaced with statement stuffers in tiny font. Then, after those kept going straight to the trash, big firms wanted to “help the environment” by eliminating the paper and started delivering electronic explanations to be deleted even faster.
I read a 44-page disclosure from a different bank/brokerage firm updating customers on this rising rate environment. The cover noted: “designed to replace the prior version of disclosure(s).” Red Flag Notice: if you have an honest simple business serving others for mutual benefit, disclosures do not multiply like Gremlins. I was rubbing my eyes at the designed-to-be-ignored-legalese, but then I saw it…why they hoped nobody got that far. Allow me to bold the font for emphasis:
Interest rates are established periodically and may seek to pay a rate as low as possible based on prevailing market and business conditions
Pardon?????
Moms and dads depositing hard earned money into these modern day savings accounts still want to trust they are being taken great care of. Instead, they are being robbed every single day of higher interest rates readily available.
Allow me to provide the executive summary for all of these disclosures now, and in the future: A publicly traded bank/brokerage firm has a fiduciary duty to make money for its shareholders first. The perfect co-conspirator for their profits is customer apathy.
“It’s immoral to let a sucker keep his money.”
-Canada Bill Jones
After that one disclosure from only one bank/brokerage firm, approximately $100 billion was moved from a 2% money market into a 0.3% bank sweep in one year. This move just about doubled the amount of customer deposits in their lower yielding sweep account. So, that will be close to $3.4 billion in earned interest taken straight from customers’ pockets in only one year.
It took Madoff a lot longer to take that much. Completely outrageous comparison? Of course it is. But it might take something absurd at a dinner with your friends to talk about it. They know about a scandal, and have been conditioned to fear them. If you asked the table what they think of Madoff, every single one has an answer. Now, how many can explain the difference between their savings rate at a bank/brokerage and what is available in a money market?
For bonus trivia over dessert (and perhaps why I eat at home a lot): Which group is losing more – Madoff’s or savings accounts’ victims?
It ain’t what you don’t know that kills you. It’s what you know that just ain’t so.
This chart shows the amount recovered to date (and still growing) for Madoff victims, out of $17.5 billion stolen. The majority have 100% of their principal back already.
Too many investors fear the headlines on isolated risks, often easy to avoid, while they ignore the footnotes about cracks in their own pools, and never see the leaks.
“One figure can sometimes add up to a lot.”
-Mae West
Below are two recent Wall Street analysts’ notes on the “cash sweep opportunity” relative to other business lines for publicly traded bank/brokerages.
“Asset management and trading are essentially break-even to loss leaders– it boils down to leveraging Client Cash.”
“Non-interest-bearing deposits are the goose that lays the golden egg.”
How do we solve this problem? One of my simplest sell disciplines is the Rule of Holes: when in one, stop digging. At the very least, make certain your cash reserves for the next couple years are in a safe money market yielding more than 2% currently.
Then, follow the money. You can do with extra savings the same thing the bank/brokerage is doing with your money, and cut out that middle man. You can buy the same bonds they are buying.
Getting more than 2% tax-free interest from the safest municipal bonds (default rate on AAA-rated is 0.0% historically) is the same as getting 3.5% in a taxable savings account in the top tax bracket.
Then, whatever is left over after plenty is in cash reserves and risk-free individual bonds, you can expose the rest of your savings to the world of capitalism and risk for higher returns and growing dividends. You have banked yourself.
Keep that big spread rather than leave it on their net interest income sheet, next to the bowl of suckers.
“An investment in knowledge pays the best interest.”
-Ben Franklin
Ryan has agreed to answer your questions and help in any way that he can for Sure Dividend subscribers. His direct email is [email protected]. You can follow him on Twitter @RyanKruegerROI
