March 15, 2021: Make Your Own Private Bank | Better Financial Future -- MyPlanIQ

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Make Your Own Private Bank

Banks are common and important in our daily life. We rely on banks or credit unions to deposit and withdraw our money. However, we can smartly utilize some basic features provided by an investment brokerage to conduct most, if not all, common individual banking transactions. Combined with using better short term and fixed income investment portfolios such as those from MyPlanIQ (see, for example, January 11, 2021: Smart Cash Management: Can I Just Withdraw From My Bond Portfolio?), one can actually construct a ‘private’ bank that’s as safe as a traditional bank but pays much better.

In this newsletter, let’s dive in to take a look at this more closely.

Common banking services

First, let’s take a look at common services a bank provides. From a bank’s client point of view, roughly, we can divide them into the following categories:

Deposits: a bank account acts as a place to hold your money. It’s a common place to receive payments (deposits) from your work (i.e. salaries, bonus, etc. like a direct deposit) or from other transactions.
Savings: Most of time, your money stays in so called checking or savings accounts and accrues some interests the bank pays. Behind the scene, the bank actually use your money to lend to others. Thus, the bank profits from the difference from loan’s interests and the interests it pays you. Often, this difference is very lucrative. Unfortunately, it’s also a source where greed develops unbound: to derive much higher profits, banks might venture into other higher risky lending practices (such as subprime house or car loans) and/or over leverage (lend way too much than it holds). This is a much bigger topic beyond this newsletter.
Bill pays: a bank also provides or enables payment service so that you can pay bills (credit card bill, tuitions, mortgage payments, rents etc.) from your account. In old days, payments are mostly through paper checks and bank transfer. Paper checks are rapidly becoming obsolete as more and more often, people and businesses are getting accustomed to electronic payments. For example, these days, you can pay rent to your landlord who has an email associated with his bank account. Granted, there are still some who insist on getting physical checks and then deposit them to a brick and mortar bank branch. But as we said, this practice is becoming less and less popular.
Loans: sometimes, you might want to borrow money from your bank. Most times, people borrow money either through a third party or through a credit card debt. Some common loans are like car loans, house mortgages and student loans, all of which can be obtained through a third party. For example, to get a house mortgage finance, you work with a broker who does all of the necessary work for you. At the end, your mortgage might be from Wells Fargo, Bank of America or other sources. To some extent, you really don’t need to care where it’s from. You just need to regularly fulfill your obligation (such as making a monthly payment). Similarly, your car dealer might be able to help you to get a car loan, often not from your bank, but from another bank that has lower (or lowest) interest.
Some miscellaneous services such as ATMs and certification of accounts.

The above pretty much covers most services a bank provides. In fact, most people (we have no a concrete number on how many, but it’s easily the majority of people) just use the above services excluding direct loans. Or put it another way, the essential banking services most people need are: deposits, savings, bill pays, ATM and/or cash withdrawal (less often now).

Banking on a brokerage account

It’s not a new idea to provide as many banking services as possible through a brokerage. In fact, many brokerages have attempted to provide this (though they have some inherent conflict of interest, more on this shortly). Today, you can see some brokerages also have banks for this purpose. The following are discount brokerages with a bank:

Schwab brokerage and Schwab bank
Etrade brokerage and Etrade bank
Merrill edge brokerage and Bank of America

The transfer between a brokerage account and its linked bank account in the above is almost instant: meaning you don’t need to wait for your money to arrive at your bank account from your brokerage account (or vice versus) : they pretty much show up in the same day.

Unfortunately, without much automatic transfer between a brokerage account and a bank account, it’s still too much hassle for people to perform the following tasks:

Better ‘savings’: say you are getting your direct deposit or just some other payments to your bank account, you’ll need to do manual transfer to your brokerage account. Furthermore, you’ll need to purchase investments (such as ETFs or mutual funds like those in a MyPlanIQ fixed income portfolio) manually. So too much hassle here.
Bill pays: you’ll need to time your bill pays and then sell your investments in a brokerage a few days before a bill’s due date and then transfers to your bank account. This again is too much hassle for people to perform.
Similarly, if you constantly need to withdraw cash from an ATM, you’ll probably want to make sure you have enough money in your bank account. Thus, you’ll need to regularly (say monthly) make sure this and perform transfer if necessary.

Of course, if you are able to budget your regular spending on a monthly or quarterly basis, you can perform the above bank-brokerage transfers and investments monthly or quarterly. Doing this persistently and consistently, as being advocated by many, can greatly contribute to your long term financial success.

Instead of utilizing both a bank and a brokerage account, it’s also possible to perform all of the above activities in a brokerage account. For example, TD Ameritrade brokerage accounts provide cash management solutions that cover bill pay and direct deposit services. It also has ATM services, all from a brokerage account. Practically, you can perform all the common banking transactions mentioned in the above from your brokerage account. Of course, you’ll still need to perform investing (buying and selling ETFs/mutual funds) regularly or on demand (for some occasionally irregular bills (such as paying for a tuition or tax)).

Finally, some people might immediately raise a concern: the FDIC insured cash in a bank account vs. non-FDIC insured cash (such as SIPC) in a brokerage account. As we stated previously, first of all, one should never literally have so much cash (over $250,000) regularly in a bank or a brokerage account. Yes, it’s possible to have a large amount of cash for a few days for some specific transaction purpose (such as buying a house, say). But it’s really not wise to have such a large amount in an account (being a bank account or a brokerage account). In a brokerage account case, nothing else, you might just simply purchase an ultra safe Treasury money market fund or Treasury ETF (such as BIL, SPDR 1-3 Month Treasury bill ETF). Holding a security in a reputable brokerage firm is extremely safe as even when the brokerage fails, you will be able to get back your security (as all of customers’ securities are required to be held in segregated accounts different from the firm’s own money. A short term Treasury ETF or money market mutual fund is safe as you can redeem (or sell) the security in an open market to get back your cash. Since these securities (such as BIL) hold US Treasury bills that are considered to be the safest, the prices of these securities are very stable.

What investments

As we have outlined, there are several options to invest your cash in a brokerage, depending on when you need cash:

Money market funds: the safest (in our opinion, almost the same as cash) areTreasury money market funds. Other higher paying money market funds are prime money market funds that might invest in short term corporate loans/bonds.
Ultra short term ETFs or mutual funds: ultra short term Treasury ETFs like BIL or SHY or just short term ETF like MINT or NEAR etc. We will introduce some ultra short term and money market fund style fixed income portfolios soon.
MyPlanIQ fixed income portfolios like MPIQ ETF Fixed Income or Schwab Total Return Bond (see fixed income page ) that can be used for cash not needed within one year.

Some details:

ETFs take T+2 to settle and that needs to be factored in when trying to time a withdrawal. Mutual funds take T+1.
MyPlanIQ is not affiliated with any brokerage and we have no monetary or any other incentives with them either.
TD Ameritrade didn’t use to be our favorite brokerage as it has a abnormally long (6 month) minimum holding period requirement for no transaction fee mutual funds. However, since now it also offers commission free for all ETFs, it becomes possible for one to use an ETF portfolio that might need regular buy/sell transactions (as frequent as monthly) for banking purpose. The commission-free transactions now open up many possibilities that used not to be possible before.
Unfortunately, to carry out the common banking activities regularly still demands too much efforts. On the other hand, the payback is that you now have a ‘bank’ that can pay out way more than any traditional bank, being from short term cash interest (using ultra short term or money market funds), intermediate term fixed income or long term stock investments. Such an integrated savings/investing environment seems to be a very good direction for one to pursue.

To summarize, with some amount of consistent efforts, one can turn a brokerage investment account (with a bank account as a supplement) into a ‘bank’ account that provide most of services needed. Automating these efforts is something MyPlanIQ is working on to make this truly easy to use.

Market Overview

The rotation of from growth to value and from large stocks to small stocks are still on going, though overall, broad base stock market indexes seem to be stabilized and now are back on track in an uptrend. It’s interesting to look at the following year to date return charts for some representative ETFs: IWM: small cap stocks, IWD, large value stocks, IWF: large growth, VNQ: REITs, XLU: utilities stocks

Rate sensitive sectors like REITs and utilities have recovered nicely. Normally, rising interest rates would negatively affect these two sectors. This indicates that the recent rotation is more a valuation based. On the other hand, the 10 year Treasury yield is still rising so markets are still not completely free of the rate impact yet.

Again, in the current very over-valued and over-extended markets, we reiterate the following practice:

For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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