Hybrid Bank Account (2017)
jefftk.com
jefftk.com
People with money in the bank do not want to open up their phone to see their bank balance has gone down by X%. People are okay with balances going up, but never going down. Thus banks are offering consumers a risk-less return.
Banks do this by themselves investing in a broad & diversified set of investments. The baseline is government bonds. Next comes government backed home-loans. Finally banks lend to businesses or investment loans. Everything beyond the government bonds requires the bank to take on the risk using their own money.
If you want to offer a "bank" account which exposes their money to risk, what you have invented is a brokerage account. Allowing people to auto-sell their investments is widely considered a bad idea because it leads to regular people leaving and entering the market often. It means incuring transations upon every purchase, and fails to help regular people with their fears.
The number 1 issue facing regular people is a lack of starting-to-invest. The number 2 issue is regular people attempting to time the market, which the surveys show they will do at the worst times.
Trading off issue #1, for issue #2 is an interesting question. I suspect the net result will be worse for consumers. They will see their balance dropping by hundreds of dollars a day on bad days, pull out, then panic buy in the next day.
In the real world such a bank account cannot be offered by a bank, as it is not a bank account. Banks already "invest" all the regular bank account money, the issue facing regular people now is that the world's risk-less rate of return is approaching zero. As such any such auto-investing "bank" account is going to be regulated like the brokerage accounts, at which point we've failed to solve issue #1, the hurdles stopping people are the same open-new-brokerage-account hurdles.
I think the end result is maybe more banks should have more brokerage functionality, as the line between brokerages and banks blur, but you need top notch UX to do this to communicate what is checking, what is FDIC savings (and when you have “enough” cash equivalents on hand to start filling other accounts), what is prime money market, and what is investment grade bonds and equities (in that order of investment operations; for argument’s sake, let’s just call it VTSAX total market). Throw in a line of credit underwritten by your income history and credit file if you want to shoot the moon; this would avoid selling investment assets to bridge between when you’re short and your next income event.
You’re essentially creating a roboadvisor for personal finance, constantly optimizing based on your income, expenses, cash on hand, and liquid/semi liquid assets. I would love such a product. Reminds me of what BankSimple could’ve been before the BBVA exit.
It’s pretty close to what OP describes, except you can never go negative balance.
I can at least respect that they have the self awareness to realize they can't manage a portfolio, but it's kinda sad that they have to allocate their savings this way. at best, they end up barely beating inflation.
this makes me wonder if there's a way to invest in something like a broad-market index fund but with an n-year lockup. obviously IRAs exist, but young people usually want to be able to access some of their savings a little earlier for a house. is there anything like this? it seems like "not being able to sell shares whenever I want" is actually an important feature.
One of the folks who works at M1 Finance pitched me on the following, for folks who have similar cashflow characteristics to the median HNer. (They've essentially productized this, and with slightly more work you could get it out of Interactive Brokers. It's hard to do with most discount brokers due to prevailing margin rates.) It captures most of the advantages of the "hybrid" account and is actually available in the status quo, which is an advantage.
Deposit your paycheck. It is automatically invested. Spend on margin; repay it the next month on payday, when you repeat the cycle. Change this only if you experience long-term unemployment, which you a) probably will not and which b) savings is the least effective financial product to prepare you for it.
Their theory is that the ~3% impact of margin is less than the fundamental return of an equity-heavy portfolio measured in small increments over a long period of time, so you should prefer to be perpetually ~100% invested in your taxable accounts rather than "materially less than totally invested", which is what most well-paid professionals are given usage of a checking account and poor decisions embedded in their financial products. (e.g. If you have $50k net worth, $8k in post-tax payroll per month, and are saving $2k per month, you're no higher than 86% invested and if you are following common financial advice you with a six month buffer in a non-investment emergency fund you are ~24% invested.)
This sounds strikingly plausible to me, for what it is worth, again contingent on one being a well-compensated professional with predictable cashflow in and out and a temperament amenable to discipline and commitment. It is not not not not the consensus of advisors to the American middle class.
Sounds like what M1 offers is indeed very close to the “hybrid bank account” described by OP. Official statements from their website [1] reveal their hybrid nature:
> Securities in M1 Invest accounts are insured up to $500,000 by the SIPC.
> M1 Spend checking accounts may be insured up to $250,000 by the FDIC.
The specific things M1 offers that make them close to this blog post are a) low margin rates (3~3.25%) and b) autoinvestment of deposits (including payroll deposits), which is grumblegrumble rarer than you'd guess.
It could be I've gone wrong in my reasoning somewhere, but I decided a while ago that the interest on savings or checking is completely insignificant compared to credit card cash back.
If you have 0.01% or 1% on your checking/savings, that means you earn that much on your average balance. If you have 1% cash back on a credit card, you are earning that on the total of your charges. So over a year, it's an order of magnitude more. As far as I can see, it doesn't make any sense to go to any effort at all to get interest on the cash that you are about to spend.
If one‘s planets are aligned thusly one will generally have far fewer financial worries than that other group of people who are not so lucky.
You can give people all the best financial advice in the world and some of them will continue to make poor choices.
More sophisticated accounts also include unsecured credit (credit cards). But that’s less common. Most just opt for automatic payments from the offset.
people are making better ways to manage risk though, it just required people with an actual education in finance to become interested.
Commonly available where you have business or high-net-worth accounts.
The credit side is basically an overdraft, and having overdraft protection today does the moving of funds around that he alludes to.
When I have a negative balance, they charge me interest. When I have a positive balance, they sweep it into a low interest investment. And when it gets really high it buys ETFs for me (which are then collateral for when it drops if I don't sell them for cash first).
Withdrawing from the brokerage account when there's no cash in it automatically creates a margin loan, so it does support a negative balance. You can also set up automatic investments. I think Schwab Bank is exactly what was requested.
Even when you have a single account, don't you also need to have a buffer that's solely invested in safe assets, like bank sweeps or treasury bills or money market funds? If you can't predict when charges will hit your bank account, and you definitely can't predict the stock market, what happens when a big charge unexpected hit when the stock market tanks? What if that big charge was actually fraudulent and was refunded a week later, but the stock market has soared?
For people with higher net worth, constantly having a buffer that is uninvested loses you more money in expectation.
As you keep putting money into the a/c, so much is reduced from the outstanding principal when calculating interest for that much period.
Even more surprising, this is one of the state run banks (State Bank of India).