Posted by William Charles on July 19, 2019
Savings Accounts

Published on July 19th, 2019 | by William Charles

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Robinhood To Relaunch High Yield Cash Account

In December last year fee free mobile trading platform Robinhood announced they would be launching a 3% APY high yield checking account. The account came with no FDIC or NCUA insurance (usually standard for a checking or savings account), Robinhood claimed that SIPC insurance would cover this account only for the head of SIPC to say that this is not true and that Robinhood had not only not cleared this product with SIPC but hadn’t even approached them to see if this type of account would be covered.

According to Fortune the company’s COO Gretchen Howard said that “We’re going to come out with a cash management account soon” at the recent Fortune’s BrainstormTech conference in Aspen. Howard says that the new product isn’t a bank account at all and will be a cash management feature within the existing brokerage account that all Robinhood customers have. Howard also said that the company had filed for a federal bank charter (needed to offer a traditional banking product such as a checking account).

At this stage a number of things are still incredibly unclear:

  • Will this new account still offer 3% APY? In recent times we’ve seen high yield saving account rates drop.
  • What insurance if any will this product provide? I assume Robinhood is trying to position this as a cash management account so that it’s covered by SIPC but it will be interesting to see if they have actually consulted anybody at SIPC to ensure this type of account does qualify.

I’m skeptical until we get some firm details. I personally wouldn’t be leaving a large amount of funds in an uninsured account and I think Robinhood’s original botched roll out should have alarm bells ringing for consumers. That being said, a 3% rate is significantly higher than anything else on the market and I can easily see some consumers taking this risk.



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AlertTip
AlertTip

3% is not “significantly higher” than WealthFront’s 2.57%

Matt
Matt

Um yes it is? 43 basis points is a fairly significant difference.

midas89
midas89

Significant means “sufficiently great” … so, I suppose it would depend on one’s balance to determine if it’s a significant difference. Using $100,000 as the balance, 43 basis points would give people $430 per year ($36 per month) more interest. Would you consider $36 per month a fairly significant difference? (I know. It’s subjective.)

Joe
Joe

It’s 16.7% higher… Let me ask you this Ms. Midwestern couponer… Is an item for $100 significantly higher than the exact same item of ~$85?

Keith
Keith

Wealthfront is FDIC insured.

Reg
Reg

Wealthfront is NOT FDIC insured. And more importantly, your funds may not be either at certain times. Wealthfront holds account holders’ money in FDIC insured banks. They sweep the money into those banks. You would have to read a lot to learn how that works, but I think it’s important to make the distinction between Wealthfront being FDIC insured and the money being FDIC insured when it is at a different bank.

https://www.wealthfront.com/static/documents/cash_sweep_program_disclosure.pdf

Max
Max

This comment is misleading, Wealthfront holds the money in FDIC bank accounts, and thus your money is always FDIC insured when held by Wealthfront. This in turn, can be interpreted as Wealthfront accounts are FDIC insured. No one really cares about the semantics of whether the institution itself has an agreement with the FDIC, as long as the money itself is indeed FDIC insured when being held by them (which it is)

Reg
Reg

Max, I have to respectfully disagree. There is at least some period of time that your money is not at an FDIC insured bank. Please read the full disclosure that I linked above:

“Cash contributed to or received in your Cash Account (“Cash Balance”) will automatically be “swept into” an FDIC-insured interest-bearing Deposit Account at one or more Participating Banks, within 1 to 3 business days (not including bank holidays or days on which the New York Stock Exchange is closed, such as Good Friday) after Wealthfront Brokerage receives such cash.“

Don’t you read this to say that there is at least some time that your money is not in an FDIC insured bank?

It’s fine if your risk tolerance allows for you to accept not having your money insured for a few days, but others have different risk tolerances. I don’t think your comment stating that my initial comment is misleading is “accurate”. I’ve provided a link to a comprehensive disclosure showing a legitimate concern about funds not being insured, at least for some period of time.

The comment above is not only accurate, but it identifies something that a lot of people don’t see and don’t know about (the fact that their money may not always be 100% FDIC insured).

Please feel free to let me know if I’m missing something or reading something wrong as I’ve been wanting to earn a higher rate in this account, but I’m not completely comfortable having my funds potentially subjected to multiple days of no insurance each time I contribute money into the account.

William Charles have you ever seen this issue of a gap in FDIC insurance addressed by wealthfront? I’ve looked, but never been able to find anything other than the disclosure linked above.

Jon
Jon

Would I get paid back if they lost the money? Is the answer yes? It is yes.

Therefore, this post is pretty pedantic.

Reg
Reg

Jon,

No, it’s not clear that you would get paid back if your money is in the gap between when you contribute it and when it is swept into an FDIC account.

Sorry, I don’t know what pedantic means.

Tang
Tang

During the sweep it’s covered by SIPC ($250,000), right?

midas89
midas89

Tang, if we read what is written at sipc.org literally, the answer is no, the SIPC would not cover the money awaiting sweeping.

It says:

“How is my cash protected:

“SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities.”

(I could be wrong, but on the surface I see it as the cash awaiting to be swept into FDIC-insured bank accounts would not be classified as from the sale of securities or intended to be used to buy securities.)

Evan
Evan

To clear things up for everyone, I emailed Wealthfront. This is the response I received:

“Yes, the Wealthfront cash account is FDIC insured. In most cases, the sweep to FDIC should happen on the same day that we receive your funds. The insurance you receive is dependent on where the funds are at the end of the day. However, there could be situations where it takes an extra day or two for the funds to be swept into the program banks. Your funds would be protected by SIPC insurance in that circumstance. Keep in mind that this is how it generally works for FDIC sweep deposit programs and is not specific to Wealthfront.

If your transition into the member bank does not take place the day the funds are received we record this and indicate it clearly on your monthly account statement. Your monthly statements will also show a breakdown of the bank(s) where your funds are being held.”

Matt
Matt

Many fun-tech products like Sofi Money and Aspiration basically have the same infrastructre in place. An investment account that is swept into FDIC banks for overnight lending. No reason to think Robinhood can’t do it.

The fed rate is basically the same as it was when they announced and subsequently aborted. I don’t see why it would be lower than 2.50% even with changes to the market. Still going to be a great product.

Robinhood’s grave mistake was to call it a “checking” account In the first place.

Dan - Legal Bank Robber
Dan - Legal Bank Robber

They made much bigger mistakes than that

Keith
Keith

Overnight lending does not pay 2.5%

Frank
Frank

I don’t understand why we differentiate checking vs savings. 3% is well below the 4% you can get on Orion and still lower than 3.33% from Heritage. Both have high enough limits that it only takes a few accounts for $100k+. This Robinhood “thing” is just noise.

And yes, you need to do some debit card transactions for the other accounts but that’s like 5 minutes of effort for an extra 1% of return

A.P.
A.P.

What do you suggest doing that could net me 10 transactions in 5 minutes? Anyways to automate that? I dislike that I need to set my direct deposit for those banks but for 4% interest I’m willing to swtich. I’m mostly excited because I use robinhood to gamble my money – this will leave me a good place to park idle cash when I can’t find good deals.

Dubya
Dubya

There’s an article on this site about how to meet debit requirements quickly.

FrugalGuy
FrugalGuy

Amazon credit loads in small increments? I think that might work

CO
CO

No insurance no care

Nicholas
Nicholas

Buyer beware. I owned Enron stock. Yes, you CAN end up with nothing.

Ferris
Ferris

But your memories and stories are priceless.

AL_PF
AL_PF

The real financial gains are the friends we made along the way.

nick
nick

only enron stock? if so that is exactly why one never puts 100% into any one investment as you never know what can happen. sry if that is the case

Benzino
Benzino

Not really part of this particular topic, but would you all recommended Robinhood compared to TD Ameritrade for <12 month stock picking? I’ve been using Robinhood the last 3 months with success but this is my first time ever putting in money into stock trading. I’m buying only blue chips to minimize risk of loss

nick
nick

it all depends on your preference and how much of a difference 6.95 (i think that is their charge) commission w TD makes compared to 0 with the other. TD is a “better” platform, but it depends if you are buying a lot of shares or tiny amounts. if you are buying small amounts then robinhood makes more sense as it is free. note that i am only talking about stock trading and NOT options as robinhood has had problems w options in the past.

AndreRamirez
AndreRamirez

I think commission based brokerages are a scam for 90% of traders unless your a warren buffet style investor (buy and forget) and also have his kind of money…

Commission free is the way to go. However I wouldn’t recommend you go with Robinhood, their customer service is abysmal and they have pretty restrictive trading hours. They also don’t let you do a stop loss AND a profit take price at the same time because reasons. Just a pretty lazy company overall, coasting on its market share.

I have a metric ton of Webull referrals but I actually think it’s a superior product too. Give it a shot if you haven’t already.

Ben
Ben

I think i see your point. I have short term goals (maybe a week to a 2-3 months) with a desire to only put $5-8K at a time on 1-3 stocks. If I see a $40-80 gain then I would sell to realize the gain. Having the stop loss limit orders would greatly reduce my need to constantly monitor. In the last three months I have found that I can stomach the possibility of a losing 8-10% in blue chips within a few days due to bad ER for example, but the upside of gaining 5-8% is really appealing than holding that cash in High Yield savings account.

midas89
midas89

I agree with William Charles’ skepticism here. After reading this part: “The company subsequently clarified that the new product will be a cash management feature within customers’ existing brokerage accounts rather than a stand-alone account,” it got me thinking about SIPC coverage.

So, say you open a Robinhood Brokerage Account, and alongside you get a Cash Management Account. Would the SIPC cover your Cash Management account if you never use the money in said account to buy stocks or any other securities via your Brokerage Account?

Would Robinhood be OK with people who open both a Brokerage & Cash Management Account but never utilize the Brokerage Account part? It will be interesting to see how it all plays out.

Keith
Keith

In order to offer a high interet rate, and still maintain the level of liquidity that is needed for a cash-sweep, Robinhood will have to invest in some very juicy (i.e.risky) very short-term securities – meaning credit and leverage risks (remember 2008?). The SIPC will not cover losses if the cash account “breaks the buck” (to borrow a term from money-market funds).

Chris
Chris

Robinhood should have no problem with customers opening both a Brokerage & Cash Management account and never using the Brokerage account.

Charles Schwab has the same requirement that the customer must open Brokerage account and a Checking account at the same time. They do not require the customer to use the Brokerage account at all.

Keith
Keith

It was such an amateur mistake that the COO should have been fired! Anyone with half a brain would have figured out the original product design would not have worked with the regulators/insurers! It was actually frightening for me as an investor to see the lack of market and product knowledge, as well as apparent lack of compliance procedures!

Jay
Jay

They were told by their lawyers and compliance people. They just decided to move forward the original time because hubris.

adam d
adam d

churners on this blog have more knowledge on banking than the COO, amateur hour, i used them in the past or some PM etfs, prob will again, but wouldnt leave a significant amount with these clowns.

AL_PF
AL_PF

That announcement last year was a super fun dumpster fire to watch, so I’m looking forward to this. Getting my popcorn ready.

That being said, I have a Robinhood account–it’s basically my gambling money–so I may try it out when they launch it, assuming it has some kind of insurance (preferably FDIC by sweeping it into accounts with FDIC-insured banks).

PAUL
PAUL

I would not trust Robinhood with my money. I have an account with Robinhood and currently holding about 40K in stocks. There were a few times that I needed help, Robinhood does not have customer service phone you can call. I tried sending them emails only to get a reply back 2-3 days later that didn’t even answer my original question.

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