Hybrid Bank Account (2017)

https://www.jefftk.com/p/hybrid-bank-account

by luu • 6 years ago

75 41 6 years ago

darkerside• 6 years ago

So you make a big purchase that drops you below an arbitrary number, and your portfolio is immediately liquidated? No thanks.

rolltiide• 6 years ago

yeah imbeciles in the blockchain space think that instant liquidation in any 24 hour market condition is a novel and good thing.

people are making better ways to manage risk though, it just required people with an actual education in finance to become interested.

jefftk3• 6 years ago

It wouldn't liquidate your entire portfolio, just enough to cover your spending.

ipython• 6 years ago

Many banks (I'm thinking Capital One 360 here) will give you a line of credit at (reasonable) daily interest. Very useful to keep a low balance in your 'transactional' checking account and let it dip temporarily below zero for a few days at a time, paying a few cents to a dollar in interest for the privilege.

Danieru• 6 years ago

Banks are a means to bridge safe-money to risk-having investments.

People with money in the bank do not want to open up their phone to see their bank balance has gone down by X%. People are okay with balances going up, but never going down. Thus banks are offering consumers a risk-less return.

Banks do this by themselves investing in a broad & diversified set of investments. The baseline is government bonds. Next comes government backed home-loans. Finally banks lend to businesses or investment loans. Everything beyond the government bonds requires the bank to take on the risk using their own money.

If you want to offer a "bank" account which exposes their money to risk, what you have invented is a brokerage account. Allowing people to auto-sell their investments is widely considered a bad idea because it leads to regular people leaving and entering the market often. It means incuring transations upon every purchase, and fails to help regular people with their fears.

The number 1 issue facing regular people is a lack of starting-to-invest. The number 2 issue is regular people attempting to time the market, which the surveys show they will do at the worst times.

Trading off issue #1, for issue #2 is an interesting question. I suspect the net result will be worse for consumers. They will see their balance dropping by hundreds of dollars a day on bad days, pull out, then panic buy in the next day.

In the real world such a bank account cannot be offered by a bank, as it is not a bank account. Banks already "invest" all the regular bank account money, the issue facing regular people now is that the world's risk-less rate of return is approaching zero. As such any such auto-investing "bank" account is going to be regulated like the brokerage accounts, at which point we've failed to solve issue #1, the hurdles stopping people are the same open-new-brokerage-account hurdles.

toomuchtodo3• 6 years ago

This is a fantastic comment.

I think the end result is maybe more banks should have more brokerage functionality, as the line between brokerages and banks blur, but you need top notch UX to do this to communicate what is checking, what is FDIC savings (and when you have “enough” cash equivalents on hand to start filling other accounts), what is prime money market, and what is investment grade bonds and equities (in that order of investment operations; for argument’s sake, let’s just call it VTSAX total market). Throw in a line of credit underwritten by your income history and credit file if you want to shoot the moon; this would avoid selling investment assets to bridge between when you’re short and your next income event.

You’re essentially creating a roboadvisor for personal finance, constantly optimizing based on your income, expenses, cash on hand, and liquid/semi liquid assets. I would love such a product. Reminds me of what BankSimple could’ve been before the BBVA exit.

kccqzy2• 6 years ago

In that case, why don't you get a regular brokerage account with cash management features? For example Fidelity offers a cash management account that can automatically withdraw from a linked brokerage account. It can also move balances above a certain threshold back into your brokerage account.

leetcrew2• 6 years ago

the psychology is a huge barrier for regular people. I have a few friends who, after failing repeatedly at making proper budgets and building savings, just started buying two year bonds every time they had extra cash. or they do stuff like deliberately having their paycheck over-withheld so they get a big tax return at the end of the year.

I can at least respect that they have the self awareness to realize they can't manage a portfolio, but it's kinda sad that they have to allocate their savings this way. at best, they end up barely beating inflation.

this makes me wonder if there's a way to invest in something like a broad-market index fund but with an n-year lockup. obviously IRAs exist, but young people usually want to be able to access some of their savings a little earlier for a house. is there anything like this? it seems like "not being able to sell shares whenever I want" is actually an important feature.

lonelappde• 6 years ago

Those prople are doing a great job managing their risk profile. You should respect them. Beating inflation is exactly the right thing to do with money you can't afford to lose.

phamilton• 6 years ago

Sounds like an all-in-one mortgage. https://www.investopedia.com/articles/mortgages-real-estate/...

kccqzy2• 6 years ago

It can be hard to predict when charges will hit your bank account, so managing this manually generally requires leaving a buffer to be sure everything will be accepted.

Even when you have a single account, don't you also need to have a buffer that's solely invested in safe assets, like bank sweeps or treasury bills or money market funds? If you can't predict when charges will hit your bank account, and you definitely can't predict the stock market, what happens when a big charge unexpected hit when the stock market tanks? What if that big charge was actually fraudulent and was refunded a week later, but the stock market has soared?

jefftk3• 6 years ago

If your net worth is low enough that this would be a major problem then yes, this wouldn't be a good product for you.

For people with higher net worth, constantly having a buffer that is uninvested loses you more money in expectation.

Taniwha• 6 years ago

I've had something similar to this - moved back to NZ, bought a house, decided to wait for a better exchange rate deal to move the rest of my $$, bank gave me a combined mortgage/checking/ATM account - at the ATM it started off with a large negative value, eventually became positive over time - didn't have the high value investment component though

alexwasserman• 6 years ago

The investment / checking side sounds very much like a normal sweep-account setup: https://www.wikiwand.com/en/Sweep_account

Commonly available where you have business or high-net-worth accounts.

The credit side is basically an overdraft, and having overdraft protection today does the moving of funds around that he alludes to.

fernly• 6 years ago

Pretty much the Schwab One account. I have a checkbook and can write checks against what is basically a brokerage account. (They wouldn't support negative balances, though.)

https://www.schwab.com/checking

modeless• 6 years ago

They wouldn't support negative balances, though

Withdrawing from the brokerage account when there's no cash in it automatically creates a margin loan, so it does support a negative balance. You can also set up automatic investments. I think Schwab Bank is exactly what was requested.

bbimbop• 6 years ago

How about when it goes negative invest in Tesla?

jedberg3• 6 years ago

I have an account like this. It's my ETrade account.

When I have a negative balance, they charge me interest. When I have a positive balance, they sweep it into a low interest investment. And when it gets really high it buys ETFs for me (which are then collateral for when it drops if I don't sell them for cash first).

nodesocket• 6 years ago

I also have E*Trade, where is this under?

jedberg3• 6 years ago

It’s just my default account. I don’t remember setting anything up. But I’ve had it a really long time so maybe I did?

jefftk3• 6 years ago

Can you use it like a regular bank account? The two main things I'd want from it are the ability to use it for paying bills (credit cards, mortgage, utility...) and writing checks.

jedberg3• 6 years ago

Yes. It has a debt card (and checks!) and it has bill pay. I pay all my bills from it.

seshagiric• 6 years ago

Back home in India, some of the banks already offer such hybrid accounts, tied to a mortgage.

As you keep putting money into the a/c, so much is reduced from the outstanding principal when calculating interest for that much period.

Even more surprising, this is one of the state run banks (State Bank of India).

jwilliams• 6 years ago

This is common (in principle) in Australia and the UK. Functionally you have a mortgage account and then an “offset” account that is automatically deducted (ie reduces) from interest payments.

More sophisticated accounts also include unsecured credit (credit cards). But that’s less common. Most just opt for automatic payments from the offset.

epicgiga• 6 years ago

I know a fintech startup founder already working on precisely this

patio112• 6 years ago

Most people on HN who are optimizing interest/etc to the penny, and I count myself among this number, have a hobby with similar economic returns to World of Warcraft but poorer graphics. The biggest lever you have available, by orders of magnitude, is optimizing the returns to your career or business. That disclaimer out of the way:

One of the folks who works at M1 Finance pitched me on the following, for folks who have similar cashflow characteristics to the median HNer. (They've essentially productized this, and with slightly more work you could get it out of Interactive Brokers. It's hard to do with most discount brokers due to prevailing margin rates.) It captures most of the advantages of the "hybrid" account and is actually available in the status quo, which is an advantage.

Deposit your paycheck. It is automatically invested. Spend on margin; repay it the next month on payday, when you repeat the cycle. Change this only if you experience long-term unemployment, which you a) probably will not and which b) savings is the least effective financial product to prepare you for it.

Their theory is that the ~3% impact of margin is less than the fundamental return of an equity-heavy portfolio measured in small increments over a long period of time, so you should prefer to be perpetually ~100% invested in your taxable accounts rather than "materially less than totally invested", which is what most well-paid professionals are given usage of a checking account and poor decisions embedded in their financial products. (e.g. If you have $50k net worth, $8k in post-tax payroll per month, and are saving $2k per month, you're no higher than 86% invested and if you are following common financial advice you with a six month buffer in a non-investment emergency fund you are ~24% invested.)

This sounds strikingly plausible to me, for what it is worth, again contingent on one being a well-compensated professional with predictable cashflow in and out and a temperament amenable to discipline and commitment. It is not not not not the consensus of advisors to the American middle class.

TheSpiceIsLife• 6 years ago

contingent on one being a well-compensated professional with predictable cashflow in and out and a temperament amenable to discipline and commitment.

If one‘s planets are aligned thusly one will generally have far fewer financial worries than that other group of people who are not so lucky.

You can give people all the best financial advice in the world and some of them will continue to make poor choices.

divbzero• 6 years ago

Very intriguing. Thanks for sharing.

Sounds like what M1 offers is indeed very close to the “hybrid bank account” described by OP. Official statements from their website [1] reveal their hybrid nature:

Securities in M1 Invest accounts are insured up to $500,000 by the SIPC.
M1 Spend checking accounts may be insured up to $250,000 by the FDIC.

[1] https://www.m1finance.com/

patio112• 6 years ago

Most of the top discount brokers either own a bank or have a sweep arrangement with banks, specifically to get FDIC insurance for large cash balances, which you do not want to have.

The specific things M1 offers that make them close to this blog post are a) low margin rates (3~3.25%) and b) autoinvestment of deposits (including payroll deposits), which is grumblegrumble rarer than you'd guess.

perl4ever• 6 years ago

"Most people on HN who are optimizing interest/etc to the penny"

It could be I've gone wrong in my reasoning somewhere, but I decided a while ago that the interest on savings or checking is completely insignificant compared to credit card cash back.

If you have 0.01% or 1% on your checking/savings, that means you earn that much on your average balance. If you have 1% cash back on a credit card, you are earning that on the total of your charges. So over a year, it's an order of magnitude more. As far as I can see, it doesn't make any sense to go to any effort at all to get interest on the cash that you are about to spend.

Spooky23• 6 years ago

That’s an interesting strategy and may be a hack around the tax law changes for some people.

CapriciousCptl• 6 years ago

By assuming margin you increase your short-term debt service, increase your expected expenses in an emergency and reduce your available credit while being limited in your access to funds in downturns because of margin calls. That undermines the strategy. In the example, you'd get the same net effect in terms of less-ability to weather emergencies and increased market exposure without having to pay margin interest by just reducing the emergency fund by 1 month's after-tax pay.

hyko• 6 years ago

Egg experimented with the first two of these features in the 1990s UK: https://en.wikipedia.org/wiki/Egg_Banking No idea what happened to the idea, but neither the product nor the company exist anymore.

every• 6 years ago

A negative balance is a dunning notice with a demand to pay. A modest positive balance is a coffee can or cigar box stuffed with cash and hidden under the bed. A large positive balance is an enticement to play the numbers or bet on the horses. None of these things is like the other...

parliament32• 6 years ago

I can kinda do this with my bank (a small credit union) with a feature called Recipes. Basically a Recipe is a IFTTT-like interface where I can say "if my balance in CHQ drops below $1k, transfer $3k from LOC to CHQ". Likewise when the balance goes over a certain threshold, I can pay off the LOC, or if that's all paid, transfer to mutual funds or what have you.

kwhitefoot• 6 years ago

The bank I use in Norway, Sbanken, allows to to agree an overdraft facility, and also to skim money off the current account into a high interest account so that, for instance, you never have more than 20 kNOK in the current account. Together with the ability to buy and sell funds and stocks via the website or app or automatically every week or month means that you can get most of the same effect fairly easily with a little bit of manual work to top up the current account from the high interest account when necessary.

davego• 6 years ago

Auto-investing? No thanks, I like my investments modular where I can fire them if they don't work

Hybrid Bank Account (2017)

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