Should You Switch to a Brokerage Checking Account?
Free checking accounts are much like public telephones, a relic of the past seen every now and again. Just 45 percent of non interest checking accounts are free, down from the peak of 76 percent just two years ago, according to Bankrate.com’s 2011 Checking Account Survey.
There is one place though, where free checking is generally plentiful – brokerage checking accounts. But is free a good enough reason to open one?
Typically, in addition to no monthly fees, with a brokerage checking account you get goodies like ATM access, online banking and bill pay, and some offer mobile banking.
Another area where brokerage checking accounts earn kudos is with overdrafts. The real fee differences tend to be in overdraft fees, says Wayne Cutler, partner and head of wealth management at Novantas, a consulting firm that specializes in the financial services industry. Banks historically have made a significant amount of money off of overdrafts but with some of the new regulations, these have come down. On the other hand, many brokerage firms tend to shy away from being in the day to day transaction space and therefore either automatically reject the overdrawn check, waive the fee for good relationships, or charge a lot less than the banks, says Cutler.
“I'm a big fan of brokerage checking accounts but only when they are used correctly. Most of our clients custody their assets at Schwab and we automatically request checkbooks when we open non-retirement accounts for clients. Our experience is that, even if they don't anticipate using the checks, one day they'll need them, perhaps to put money down for a car purchase, or to pay their tax bill, or some other out-of-the-ordinary expense. Then, it comes in really handy to have the checks,” says Mari Adam, a certified financial planner with Adam Financial Associates.
What they offer is convenience and a place to keep all the assets in one place. For example, explains Adam, it's convenient to have an account that collects all the monthly or quarterly payments of dividends and interest from the portfolio. If you don't need that income, it can be reinvested in other assets.
Some of her retired clients have their Social Security checks deposited to their brokerage money market, and they pay bills automatically from the accounts. Often, it helps them segregate their "investment" assets from their "spending" assets.
“We know that clients tend to spend whatever is in their checking account. So brokerage checking accounts replace the old savings account for many people. They let us automatically take money from the paycheck, or the checking account, every month, and move it into an investment account. For many people, we set up an automatic sweep that puts money into their brokerage every month to help them save on a scheduled basis,” says Adam.
In reverse, Adam often sets up a monthly sweep from the brokerage checking to the checking account every month. “It's a great way to give people some spending discipline and help them withdraw the "right" amount from their investment portfolio every month (for example, when they're in retirement). What doesn't usually work is for them to write checks whenever they need money -- this almost always leads to overspending. It's better to hold on to the traditional checking account for routine monthly spending and keep the brokerage checking for supplemental or investment items.” she says.
Look before you leap
But for all the advantages, there a couple of things you should know. Right now, brokerage money market funds are paying next to nothing. So while in the past this has been a very competitive place to "stash your cash," right now it is most certainly not. If I have a client who intends to hold on to a big sum of money for an emergency fund, they are better off keeping it at an online or brick-and-mortar bank or credit union and earning 0.75% or 1.00% or whatever they can get. So while brokerage checking accounts are super convenient, right now they are not the place to go to earn interest, says Adam.
Know too, that some brokerage checking accounts may require minimum balances, either for the checking account or the combined relationship, points out Cutler. You'll need to ask whether the deposits to your brokerage checking account are insured by the FDIC, because not all of them are, it varies, says Cutler.
You may not also have the same convenience of access as you would a bank checking as some brokerages may limit the number of monthly or daily transactions,” adds Kelley Long, president of KCL Financial Coaching.
Finally, says Cutler, “To date, brokerages prefer not to be in the day-to-day transaction/payments business which is the core to the banking industry. However, the tide is changing and as brokerages look for other revenue opportunities as well as maintaining balances as retirees de-accumulate, they will become a more formidable competitor to banks.” Which could be good, very good, for you.