How the Fed Funds Rate Impacts the Wealthfront Cash Account

https://blog.wealthfront.com/how-the-fed-funds-rate-impacts-the-wealthfront-cash-account/

by jbredeche • 7 years ago

48 55 7 years ago

blog.wealthfront.com

nodesocket• 7 years 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.

throwaway13337• 7 years 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.

tdhoot2• 7 years ago

It's not FDIC covered during the transitional period, and they don't say how long the transitional period is either.

jonfriese33• 7 years ago

They don't have any advisory fee on the cash account. That is only for brokerage accounts.

URSpider942• 7 years ago

1. Here’s a helpful FAQ from Wealthfront that might explain it: 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• 7 years 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.

astura3• 7 years 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.

0x8BADF00D2• 7 years ago

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

lkrubner• 7 years ago

Inflation is extremely low by historical standards:

http://www.smashcompany.com/business/nflation-in-the-usa-has...

lotsofpulp6• 7 years 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.

benj1113• 7 years ago

What's the alternative?

Stash it under the mattress so you don't make any gains that can be taxed?

Save it in gold so you can be taxed as capital gains (unless you suffer a capital loss)?

Save in stocks & shares so you can be taxed on your capital gains and dividends? Good luck if you need to fix your boiler in the middle of a down turn.

Bitcoin? That has proven itself to be a rock stable currency and you still won't avoid losing your shirt / capital gains tax.

zMiller• 7 years ago

Technically you would've 'lost your shirt' in bitcoin if you had bought it during only 2 of the last 520+ months...

toomuchtodo2• 7 years ago

There are no safe alternatives (by central bank design). Keep a reasonable amount in cash, stagger the rest by risk (bonds, equities, real estate, etc).

dang2• 7 years ago

Please don't post like this to HN. If you know more, share some of what you know so others can learn. Calling your inferiors "dopes" adds no information and breaks the site rule against name-calling.

https://news.ycombinator.com/newsguidelines.html

0x8BADF00D2• 7 years ago

I didn't mean it as "you're a dope", therefore "you are inferior to me". I meant it as "you are a dope if you believe everything the government tells you, especially in regard to inflation figures". Subtle difference.

mslate• 7 years 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• 7 years ago

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

sailfast• 7 years 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• 7 years ago

This article is advertising for their product, nothing more.

lr4444lr• 7 years 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• 7 years 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

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.

roenxi• 7 years 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• 7 years 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.

toomuchtodo2• 7 years ago

PSA: You can track market sentiment with regards to rate cuts here: https://www.cmegroup.com/trading/interest-rates/countdown-to... (CME FedWatch Tool)

awillen• 7 years ago

For the average person, the fed funds rate is a complicated thing that requires background about how money moves between financial institutions that most people simply don't have. The HN crowd is going to be fairly educated, but for the average person, explanations of these types of concepts are valuable.

That said, it's just fundamentally dishonest when they say this came as a surprise. Everyone in the financial industry expected it and the market has been pricing it in for quite a while. They clearly know this is going to be read by people who are of below average financial literacy and are blatantly trying to deceive them.

driverdan• 7 years 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?

jakelazaroff2• 7 years 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.

breck2• 7 years 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.

astura3• 7 years 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.

breck2• 7 years ago

Thanks! Didn't know Fidelity did that. I'll see about rolling over to them for now.

How the Fed Funds Rate Impacts the Wealthfront Cash Account

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