By Jacob Passy
Wealthfront, the robo adviser investment firm, is rolling out cash accounts that will garner interest at more than 20 times the national average rate.
The Wealthfront Cash Account offers an annual percentage yield of 2.24% and comes with Federal Deposit Insurance Corp. insurance for balances up to $1 million. MarketWatch first reported that Wealthfront was beta testing cash accounts in December.
The no-fee offer is obviously aimed to help increase its customer base, so Wealthfront can offer more fee-based services and, the company readily acknowledges, collect data to better understand consumers’ financial habits.
Adding more no-fee customers also allows Wealthfront to offer more fee-based services and collect data so it can have more insight into consumer habits.
Some caveats: While the yield of Wealthfront’s cash accounts is high, some online banks offer even better rates. North American Savings Bank /zigman2/quotes/201205418/composite NASB -0.50% has accounts that earn a 2.53% annual percentage yield. And accounts with CIT Bank /zigman2/quotes/200594362/composite CIT -1.74% and TAB Bank earn in excess of 2.40% APY.
Moreover, depending on how readily consumers need access to their funds, they can earn more interest by putting their money into certificates of deposit. Two-year CDs from Mercantil Bank /zigman2/quotes/203662746/composite AMTB -3.14% , Synchrony Bank /zigman2/quotes/203661733/composite SYF -1.43% and Capital One /zigman2/quotes/204480509/composite COF -2.13% , among other companies, can earn 2.80% APY or more.
The accounts will only available to existing Wealthfront investment clients to start. In coming months, the company plans to offer the cash accounts to consumers who aren’t existing Wealthfront customers. In the meantime, those consumers can add their name to a waiting list.
To sign up, Wealthfront customers only need to make a deposit of $1. The company said the accounts will carry no management or advisory fees, and consumers can make unlimited, free transfers between the cash accounts and their Wealthfront investment accounts. At this time, the accounts will not come with debit cards or checks.
The company wants more consumer financial data
There are some caveats that customers should be aware of before handing over their money. Opening a savings account with Wealthfront means a consumer is giving the company even more access to their personal financial data. That data then helps Wealthfront. The company’s ultimate goal is to create “self-driving money,” Dan Carroll, Wealthfront’s co-founder and chief strategy officer, said in an interview. Beyond fully-automated investing (down to providing financial advice), Carroll said the company hopes to one day fulfill its clients every financial need — from saving for retirement to paying bills.
Wealthfront’s rollout comes just months after Robinhood’s controversial announcement of its own cash management accounts. When Robinhood originally introduced its account, the trading platform claimed they would be insured by the Securities Investor Protection Corporation, only for the regulation body to say that this was not the case.
Since then, Robinhood has put its program on hold and stopped accepting sign-ups from interested consumers, and lawmakers have raised concerns over the planned accounts. (Robinhood declined to comment on the program.)
Offering cash or debit accounts has grown popular as a strategy among financial technology firms in recent years as a means of diversifying their businesses. For investment-oriented firms like Wealthfront and Robinhood, this strategy has taken on a renewed significance in light of stock-market volatility that has some investors seeking other places to park their money.
Wealthfront looks to take on traditional banks — by partnering with them
The cash accounts Wealthfront is offering come with much higher interest rates than many large brick-and-mortar banks. Nationally, savings accounts carry an average yield of 0.09%, while interest-bearing checking accounts earn a 0.06% annual percentage yield on average, according to data from the FDIC .
Nationally, savings accounts carry an average yield of 0.09%, while interest-bearing checking accounts earn a 0.06% annual percentage yield on average.
At 2.24%, Wealthfront’s accounts earn interest at a rate on par with many online banks, such as Simple and Ally Bank /zigman2/quotes/206227672/composite ALLY -1.11% . To get this rate — and FDIC insurance — Wealthfront is working with traditional banks.
Unlike other cash management accounts, the money deposited into Wealthfront’s cash management accounts is not invested in order to earn this interest. “It was important for us to offer FDIC insurance on our account so there was zero-risk,” Carroll said. “We didn’t want to have any market risk.”
Instead, Wealthfront is using the brokered deposit model. The company has formed partnerships with four banks — including East West Bank /zigman2/quotes/206183036/composite EWBC -0.18% and New York Community Bank /zigman2/quotes/207630974/composite NYCB -1.52% . (Wealthfront said it was not authorized to reveal the Identity of the other two banks.)
When Wealthfront’s customers deposit money into their cash accounts, those funds are then transferred into actual bank accounts at Wealthfront’s partner institutions. Those bank accounts then earn interest that is passed onto the customers. This brokered-deposit strategy also allows Wealthfront’s cash accounts to qualify for FDIC coverage — as a non-bank, Wealthfront is otherwise ineligible for deposit insurance.
The brokered-deposit model is a common strategy that the FDIC allows, an agency spokesman said, noting that Wealthfront had not approached the FDIC directly about the product. Other fintech firms like Acorns, Stash and SoFi have used the brokered model in order to offer cash or debit accounts .
Wealthfront’s accounts could appeal to a wealthy clientele
The $1 million limit on FDIC insurance could prove to be a major selling point for some consumers. Individual consumers typically only receive FDIC-coverage for $250,000 in deposits with an institution unless they jump through hurdles, such as setting up a trust account with multiple beneficiaries.
However, the brokered model Wealthfront is using means that one cash account can have the equivalent insurance coverage of four individual bank accounts. And that number could theoretically grow in time if Wealthfront were to partner with additional banks for this program.
In selecting partners, Wealthfront didn’t just consider them based on the interest rates they offered. Partners were also assessed based on capital adequacy, management, earnings and liquidity, Carroll said. “We wanted to work with banks that are doing it the right way,” Carroll said.