When to Transfer Your Savings to a Roboadvisor
Interest rates are rising after years of stagnation, according to the Wall Street Journal, but conventional banks still offer customers an average of 0.10 percent savings. This makes the roboadvisor offerings from Wealthfront and Betterment more attractive.
Wealthfront offers a cash management account with an annualized rate of return of 2.24% and the Betterment version provides2.19% customers (as of March 1, 2019). According to Marketwatch, Fidelity has also entered the game. “Consumers can deposit cash into an account with a brokerage firm, where it is held until the next business day, after which it is ‘transferred’ to another FDIC-insured interest account with a partner bank.”
Robo offers higher rates for obvious reasons: They aim to attract more customers and retain them. In theory, their users will benefit not only from higher rates but also smoother money management if they also use the robot’s investment products.
But there are a few things to look out for before transferring your savings.
Disadvantages of cash accounting
So what’s the catch? The main thing to know is that these “money management” accounts are technically investment accounts. However, the magazine notes that up to $ 1 million in the Wealthfront account is provided by the Federal Deposit Insurance Corporation (FDIC), which insures your traditional bank account because the money is “flipped” to another bank, as is the case with Fidelity. the aforementioned cash and settlement account . Betterment’s Smart Saver accounts, as they are also called, are invested in a low-risk ETF portfolio, i.e. US Treasury bonds, and are insured by the Securities Investor Protection Corporation (SIPC).
Internet broker Robinhood has recently been criticized for launching a similar product, but without clarifying how and whether the funds were insured. (Update: Earlier in this article, I referred to Robinhood as a “robot,” but this is a brokerage in its own right .)
But that means they are taxed differently than your standard savings account. “For example, interest earned through US Treasuries is tax deductible at the state and local levels, while interest earned in a traditional savings account is tax deductible,” writes Marketwatch.
Here’s how Betterment explains the tax implications :
Dividends you earn are also considered income and are usually taxed [as income]. However, since most (80 percent) of the money in your Smart Saver is invested in short-term US Treasury bonds, a portion of the dividend paid on short-term US Treasury bonds is not subject to state and local taxes.
It’s also worth noting that while most of Smart Saver’s income will come from dividends and be taxed as described above, normal price changes can make a difference. If the stock you own in Smart Saver rises or falls in value, then on sale, any realized gains or losses will be counted towards your taxes (if you own less than a year, at your short-term capital gains tax rate. If you hold more than a year, at your long-term rate).
There are also concerns that the use of these accounts would encourage savers to invest in robots, which could lead to potentially higher fees if investors are not picky, and invest in, say, a pre-retirement brokerage account that should be avoided .
It is important to note that the magazine reports that Wealthfront will charge approximately 0.25% per annum on clients’ income. “This means that a $ 25,000 contributor will bring Wealthfront $ 62.50 a year,” writes the WSJ. “On the contrary, this tab earns the bank about $ 600, which pays the minimum interest.” Betterment prices also start at 0.25% per annum.
If any of this makes you uncomfortable, high yielding online savings accounts from Ally , American Express, and Goldman Sachs can offer nearly the same risk-free annual interest rate (or commission in most cases). Meanwhile, money market accounts and CDs are not attractive, but they are not a bad option if you want to get some percentage of your short-term cash .
But if clients have a ton of money that they don’t want to invest (say, because it’s their reserve fund or because it’s tied to a short-term goal), a robot advisor isn’t necessarily a bad way to go.