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How the Fed Funds Rate Impacts the Wealthfront Cash Account

48 points by jbredeche 7y ago

nodesocket 7y ago
I have a high interest savings account with Marcus by Goldman Sachs. They used to pay out 2.25% but lowered to 2.15% recently. There are a few big red flags about Wealthfront for me... 1.) They claim to offer FDIC-insured up to $1 million, yet on the official FDIC website, and as far as I understand they only insure up to $250,000 per account. How is $1M possible? 2.) With the 10 year and 2 year US treasury yields plumitting well below 2% today, I don't understand how wealthfront can continue to offer 2.57% without taking a loss.
- astura 7y ago
  They can offer $1 million dollars in in insurance because it's an FDIC Sweep account - the funds may be stored at multiple banks behind the scenes. Fidelity, SoFi, and others offer FDIC sweeps as well.
- throwaway13337 7y ago
  The way they and their competitor, betterment, work is that they distribute your funds to a real bank or up to 4 of them for that 1m FDIC insurance. The real risk I see using them is the money transition period from your current bank to their partner banks while moving the funds. It's why I opted for a traditional bank with high yield savings but not as high as theirs. I'd be interested to know how they explain FDIC insurance during the transitional period. I could be wrong and they have that covered, too.
  - tdhoot 7y ago
    It's not FDIC covered during the transitional period, and they don't say how long the transitional period is either.
    - jakelazaroff 7y ago
      What is the transitional period? Is it that when you make a deposit, you're actually transferring to Wealthfront, which distributes it to the real bank accounts they keep your money in?
      - tdhoot 7y ago
        Yes, that's my understanding. But there's no guarantee that Wealthfront transfers to the FDIC-insured bank accounts as soon as possible. For all we know, Wealthfront could hold on to it for weeks.
- jonfriese33 7y ago
  They don't have any advisory fee on the cash account. That is only for brokerage accounts.
- URSpider94 7y ago
  1. Here’s a helpful FAQ from Wealthfront that might explain it: https://support.wealthfront.com/hc/en-us/articles/360022405852-Is-the-money-in-my-cash-account-FDIC-insured- https://support.wealthfront.com/hc/en-us/articles/3600224058... Tl;dr: they distribute your money to multiple FDIC-insured banks. 2. The federal funds rate and LIBOR both remain at 2.25%, give or take daily fluctuations. Furthermore, if you look a little further at Wealthfront, you might notice that they are offering margin loans at 4.75% - 6%, secured by a diversified investment portfolio at 3:1, so it’s entirely conceivable that they could be loaning the same money out again at a profit.
  - Danieru 7y ago
    Wealthfront is not going to be loaning out money from their sweeps product to margin borrowing. Instead they will have a larger partner bank which offers then margin loans, they then mark up the interest rate and pass it on. They do not have the accreditation to be issuing loans based on deposites. Thus why their banking product is a sweeps account.
    - URSpider94 7y ago
      I fully realize that. However, it's entirely possible that they are using the same banking partners to issue the margin loans and handle their deposit accounts. Even if they are not, the larger point is that there's a nice spread between what they are paying on the savings account and what they are making in margin interest -- and the margin account is extremely well-collateralized with liquid assets deposited in the borrower's Wealthfront account. The GP poster intimated that WF had to be losing money on their savings rate, and I'm just pointing out that it's entirely sustainable.
0x8BADF00D 7y ago
The dopes that are saving in USD will pay a huge inflation tax. Same for the bond holders (aka bag holders) too.
- lkrubner 7y ago
  Inflation is extremely low by historical standards: http://www.smashcompany.com/business/nflation-in-the-usa-has-been-low-the-increase-in-asset-prices-is-not-a-form-of–inflation-because-you-dont-lose-the-money-you-spend http://www.smashcompany.com/business/nflation-in-the-usa-has...
  - lotsofpulp 7y ago
    Inflation measured across the whole US is not a useful metric when the gaps in economic potential are so wide. Most of the US is not experiencing economic growth, and is probably actually experiencing deflation due to decreasing economic potential and population. I don’t see the purpose of lumping in data from those places with the urban areas that most people want to live in and are able to find work and economic growth. The inflation in rent and real estate is very real because more and more people want to (and need to) live in a smaller and smaller area, which also causes everything else to increase. You can even see it in the stock market. Fewer and fewer companies are capturing most of the gains, and their equity values show it.
    - TheAdamAndChe 7y ago
      The implication here being that people in non-urban areas of the country shouldn't experience any reasonable amount of growth.
      - lotsofpulp 7y ago
        I didn’t imply that. I wrote that trying to measure inflation with one metric in what is essentially two different economies (or countries if you will) is useless.
mslate 7y ago
"The vast majority of our competitors will likely lower their rates even more than 0.25%" is silly FUD Personal Capital & Betterment are lowering their rates on their high yield accounts by the same 0.25%
- TAForObvReasons 7y ago
  Sofi and a bunch of other high yield checking/savings accounts are doing the same
sailfast 7y ago
They say multiple times that this decrease was unexpected but it seemed to be pretty well telegraphed based on my read of the situation. Is this article for customers that don’t know what interest rates are so they are not upset about a lower rate?
- etrautmann 7y ago
  This article is advertising for their product, nothing more.
lr4444lr 7y ago
Frankly, I don't trust anything Wealthfront says about this product. Try invoking arbitration opt-out as per your right in 18-A of the Wealthfront ToS: turns out they don't actually support opt out, and will gladly cancel your account if you insist on having it. Makes you wonder what else in their contract they won't adhere to.
apo 7y ago
That's an awful lot of explaining for a pretty simple concept. Fed funds rate is a benchmark interest rate that Wealthfront, like many products, is tied to. Rate goes down, and your interest payment goes down. I suspect this has to do with fact that there has never been a rate decrease in the lifetime of the product: > Wealthfront Inc. is an automated investment service firm based in Redwood City, California,[2][3][4][5] founded by Andy Rachleff and Dan Carroll in 2008 https://en.wikipedia.org/wiki/Wealthfront https://en.wikipedia.org/wiki/Wealthfront The decrease came only as a surprise to those who weren't paying attention. The rate is in all likelihood headed to zero and below, just like so many other industrialized economies have already done. If that comes as a surprise then once again, you haven't been paying attention.
- deleted 7y ago
  [deleted]
- roenxi 7y ago
  There are a lot of people who are logical, intelligent, earn money and understand neither numbers or finance. I have some sympathy for the financial companies trying to explain what is going on; the system is only simple to those that understand it.
- joeyrideout 7y ago
  Indeed, word on The Street leading up to the announcement was 0.25 rate cute was most likely followed by a small likelihood of 0.50 cut. No surprise. I disagree, however, that rates are going to zero in the States. ZIRP/NIRP are going very badly in EU and JP and The Fed does not want to replicate that outcome. What's more likely is a long-term interest rate peg before cutting short-term rates that low.
  - toomuchtodo 7y ago
    PSA: You can track market sentiment with regards to rate cuts here: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... (CME FedWatch Tool)
- 7y ago
driverdan 7y ago
Why are people upvoting this? It's a thinly veiled ad for Wealthfront with minimal content. How is anyone surprised that savings account interest rates are tied to Fed rates?
- jakelazaroff 7y ago
  How is there minimal content? It's a simple explanation of how how Fed rates impact interest rates. People have to learn about these things somewhere; I learned about it from this article.
breck 7y ago
Slightly off topic: does anyone know if Wealthfront manages HSAs? I really have liked their stuff and would like to "rollover" (not sure if that's the proper term) an old former employer HSA to them.
- astura 7y ago
  Doesn't appear that they do, based on Google, but I can offer a suggestion, Fidelity is the best place to keep your HSA. No fees and excellent investment options.
  - breck 7y ago
    Thanks! Didn't know Fidelity did that. I'll see about rolling over to them for now.
    - astura 7y ago
      It's new - They've done HSAs for employers for more than a decade but they just very recently opened them up to individuals. I have an individual HSA with Fidelity, so I'm speaking from experience.

48 points by jbredeche 7y ago

I have a high interest savings account with Marcus by Goldman Sachs. They used to pay out 2.25% but lowered to 2.15% recently. There are a few big red flags about Wealthfront for me... 1.) They claim to offer FDIC-insured up to $1 million, yet on the official FDIC website, and as far as I understand they only insure up to $250,000 per account. How is $1M possible? 2.) With the 10 year and 2 year US treasury yields plumitting well below 2% today, I don't understand how wealthfront can continue to offer 2.57% without taking a loss.

astura 7y ago
They can offer $1 million dollars in in insurance because it's an FDIC Sweep account - the funds may be stored at multiple banks behind the scenes. Fidelity, SoFi, and others offer FDIC sweeps as well.
throwaway13337 7y ago
The way they and their competitor, betterment, work is that they distribute your funds to a real bank or up to 4 of them for that 1m FDIC insurance. The real risk I see using them is the money transition period from your current bank to their partner banks while moving the funds. It's why I opted for a traditional bank with high yield savings but not as high as theirs. I'd be interested to know how they explain FDIC insurance during the transitional period. I could be wrong and they have that covered, too.
- tdhoot 7y ago
  It's not FDIC covered during the transitional period, and they don't say how long the transitional period is either.
  - jakelazaroff 7y ago
    What is the transitional period? Is it that when you make a deposit, you're actually transferring to Wealthfront, which distributes it to the real bank accounts they keep your money in?
    - tdhoot 7y ago
      Yes, that's my understanding. But there's no guarantee that Wealthfront transfers to the FDIC-insured bank accounts as soon as possible. For all we know, Wealthfront could hold on to it for weeks.
jonfriese33 7y ago
They don't have any advisory fee on the cash account. That is only for brokerage accounts.
URSpider94 7y ago
1. Here’s a helpful FAQ from Wealthfront that might explain it: https://support.wealthfront.com/hc/en-us/articles/360022405852-Is-the-money-in-my-cash-account-FDIC-insured- https://support.wealthfront.com/hc/en-us/articles/3600224058... Tl;dr: they distribute your money to multiple FDIC-insured banks. 2. The federal funds rate and LIBOR both remain at 2.25%, give or take daily fluctuations. Furthermore, if you look a little further at Wealthfront, you might notice that they are offering margin loans at 4.75% - 6%, secured by a diversified investment portfolio at 3:1, so it’s entirely conceivable that they could be loaning the same money out again at a profit.
- Danieru 7y ago
  Wealthfront is not going to be loaning out money from their sweeps product to margin borrowing. Instead they will have a larger partner bank which offers then margin loans, they then mark up the interest rate and pass it on. They do not have the accreditation to be issuing loans based on deposites. Thus why their banking product is a sweeps account.
  - URSpider94 7y ago
    I fully realize that. However, it's entirely possible that they are using the same banking partners to issue the margin loans and handle their deposit accounts. Even if they are not, the larger point is that there's a nice spread between what they are paying on the savings account and what they are making in margin interest -- and the margin account is extremely well-collateralized with liquid assets deposited in the borrower's Wealthfront account. The GP poster intimated that WF had to be losing money on their savings rate, and I'm just pointing out that it's entirely sustainable.

0x8BADF00D 7y ago

The dopes that are saving in USD will pay a huge inflation tax. Same for the bond holders (aka bag holders) too.

lkrubner 7y ago
Inflation is extremely low by historical standards: http://www.smashcompany.com/business/nflation-in-the-usa-has-been-low-the-increase-in-asset-prices-is-not-a-form-of–inflation-because-you-dont-lose-the-money-you-spend http://www.smashcompany.com/business/nflation-in-the-usa-has...
- lotsofpulp 7y ago
  Inflation measured across the whole US is not a useful metric when the gaps in economic potential are so wide. Most of the US is not experiencing economic growth, and is probably actually experiencing deflation due to decreasing economic potential and population. I don’t see the purpose of lumping in data from those places with the urban areas that most people want to live in and are able to find work and economic growth. The inflation in rent and real estate is very real because more and more people want to (and need to) live in a smaller and smaller area, which also causes everything else to increase. You can even see it in the stock market. Fewer and fewer companies are capturing most of the gains, and their equity values show it.
  - TheAdamAndChe 7y ago
    The implication here being that people in non-urban areas of the country shouldn't experience any reasonable amount of growth.
    - lotsofpulp 7y ago
      I didn’t imply that. I wrote that trying to measure inflation with one metric in what is essentially two different economies (or countries if you will) is useless.

mslate 7y ago

"The vast majority of our competitors will likely lower their rates even more than 0.25%" is silly FUD Personal Capital & Betterment are lowering their rates on their high yield accounts by the same 0.25%

TAForObvReasons 7y ago
Sofi and a bunch of other high yield checking/savings accounts are doing the same

sailfast 7y ago

They say multiple times that this decrease was unexpected but it seemed to be pretty well telegraphed based on my read of the situation. Is this article for customers that don’t know what interest rates are so they are not upset about a lower rate?

etrautmann 7y ago
This article is advertising for their product, nothing more.

lr4444lr 7y ago

Frankly, I don't trust anything Wealthfront says about this product. Try invoking arbitration opt-out as per your right in 18-A of the Wealthfront ToS: turns out they don't actually support opt out, and will gladly cancel your account if you insist on having it. Makes you wonder what else in their contract they won't adhere to.

apo 7y ago

That's an awful lot of explaining for a pretty simple concept. Fed funds rate is a benchmark interest rate that Wealthfront, like many products, is tied to. Rate goes down, and your interest payment goes down. I suspect this has to do with fact that there has never been a rate decrease in the lifetime of the product: > Wealthfront Inc. is an automated investment service firm based in Redwood City, California,[2][3][4][5] founded by Andy Rachleff and Dan Carroll in 2008 https://en.wikipedia.org/wiki/Wealthfront https://en.wikipedia.org/wiki/Wealthfront The decrease came only as a surprise to those who weren't paying attention. The rate is in all likelihood headed to zero and below, just like so many other industrialized economies have already done. If that comes as a surprise then once again, you haven't been paying attention.

deleted 7y ago
[deleted]
roenxi 7y ago
There are a lot of people who are logical, intelligent, earn money and understand neither numbers or finance. I have some sympathy for the financial companies trying to explain what is going on; the system is only simple to those that understand it.
joeyrideout 7y ago
Indeed, word on The Street leading up to the announcement was 0.25 rate cute was most likely followed by a small likelihood of 0.50 cut. No surprise. I disagree, however, that rates are going to zero in the States. ZIRP/NIRP are going very badly in EU and JP and The Fed does not want to replicate that outcome. What's more likely is a long-term interest rate peg before cutting short-term rates that low.
- toomuchtodo 7y ago
  PSA: You can track market sentiment with regards to rate cuts here: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... (CME FedWatch Tool)
7y ago

driverdan 7y ago

Why are people upvoting this? It's a thinly veiled ad for Wealthfront with minimal content. How is anyone surprised that savings account interest rates are tied to Fed rates?

jakelazaroff 7y ago
How is there minimal content? It's a simple explanation of how how Fed rates impact interest rates. People have to learn about these things somewhere; I learned about it from this article.

breck 7y ago

Slightly off topic: does anyone know if Wealthfront manages HSAs? I really have liked their stuff and would like to "rollover" (not sure if that's the proper term) an old former employer HSA to them.

astura 7y ago
Doesn't appear that they do, based on Google, but I can offer a suggestion, Fidelity is the best place to keep your HSA. No fees and excellent investment options.
- breck 7y ago
  Thanks! Didn't know Fidelity did that. I'll see about rolling over to them for now.
  - astura 7y ago
    It's new - They've done HSAs for employers for more than a decade but they just very recently opened them up to individuals. I have an individual HSA with Fidelity, so I'm speaking from experience.