As traditional banks face increasing competition from fintech startups, some brokerages are offering customers better returns and account protection. With Betterment LLC doubling the amount of Federal Deposit Insurance Corp. coverage to $2 million and rival Wealthfront increasing its coverage to $3 million, brokerages are quickly becoming an attractive alternative to traditional banks. Furthermore, they are offering returns of at least 4% on certain accounts.
The recent collapse of Silicon Valley Bank, the largest U.S. bank to fail in more than a decade, has triggered a shift in focus for banks, making them realize the value in diversifying their sources of liquidity. Banks are now seeking deposits from more sources, providing brokerages with better terms, which ultimately benefits customers. Fidelity Investments has even claimed that a customer could have up to $5 million of cash covered by FDIC insurance.
Brokerages are not FDIC insured, but they can offer coverage to customers through cash sweep programs, which are offered in most brokerage accounts. These programs sweep balances not held in stocks or another invested asset into partner banks, and each of those partner banks provides up to $250,000 in FDIC insurance. Depending on the brokerage, participating banks could be Wall Street giants such as Goldman Sachs Group Inc. and Citigroup Inc. or community banks like Village Bank & Trust based in Illinois.
Customers are benefiting from this shift in focus from banks, which have recently been willing to pay more to hold customer cash for brokerages. Wealthfront, for instance, usually increases the yield on its cash account when the Federal Reserve hikes the central bank rate. Last month, Wealthfront raised the advertised rate on its cash account to 4.3% from 4.05%, passing on all of the most recent central bank increases to customers for the second time in a row.
With brokerage accounts now carrying interest rates that rival high-yield savings accounts and offering transactional capabilities similar to checking accounts, more people are moving their money out of bank accounts. However, before making the switch, it is important to review the list of banks that your brokerage partners with to insure deposits and check to make sure they don’t overlap with any of your existing banking relationships. Cash sweep programs don’t increase the amount of insurance coverage you are eligible for at any individual bank, so it is important to ensure that you are maximizing your insurance coverage.
In conclusion, as brokerages offer better returns and account protection, traditional banks are facing increasing competition. Customers are benefiting from the shift in focus from banks, which are now seeking deposits from more sources, providing brokerages with better terms, and ultimately benefiting customers. However, it is important to review the list of banks that your brokerage partners with to ensure that you are maximizing your insurance coverage.
