Online brokerages are trying to compete with the online banks for deposits. The brokerages are coming out with cash management accounts that function a lot like savings accounts and checking accounts. In the last year, many of these cash management accounts have yields that challenge the online banks. The latest challenger is Wealthfront Brokerage. Two months ago, Wealthfront launched the FDIC-insured Cash Account with a 2.24% APY. According to this Wealthfront blog post, they attracted over $1 billion in deposits in less than a month. The rate increased to 2.29% APY, and early this week, the rate has increased to 2.51% APY.
In addition to a higher rate, Wealthfront is promoting their Cash Account as having two big advantages over savings accounts at banks:
- $1 million of FDIC insurance (standard FDIC insurance at banks is $250k)
- No limit on the number of withdrawals per statement period (bank savings accounts are generally limited to 6)
The issue of FDIC insurance and the safety of this Wealthfront Cash Account requires a thorough discussion, but before going into that issue, here’s a summary of the features of the Wealthfront Cash Account:
- New customers can just open this Cash Account without an Investment Account (per CSR)
- $1 minimum initial deposit and minimum balance (per FAQ)
- No monthly service fees (per FAQ)
- The following services are not available (but may be in the future): debit card, ATM access, direct deposit, bill pay, checks, mobile check deposit (per FAQ)
- Unlimited, free transfers to/from account at another institution (per FAQ)
- ACH transfer limit of $250k per day (per CSR)
- Wire transfers can be done for amounts over $250k (per CSR)
- ACH transfers (in or out) can only be initiated from Wealthfront’s website (per CSR)
- Mobile app is available, but not mobile check deposit (per FAQ)
- Interest will be reported on Form 1099-INT (per FAQ)
One significant advantage over a bank savings account is that there’s no limit on the number of monthly withdrawals. Bank savings accounts are limited by federal regulation to no more than six withdrawals (most types) per statement period.
One noteworthy disadvantage is that Wealthfront is not allowing ACH deposits or withdrawals initiated from another institution. So to withdraw money, you're dependent on Wealthfront's website.
Wealthfront’s customer service isn’t as accessible as you would expect. They don’t list any phone number on their Contact Page. They only provide a contact form that can be used to send them a message. They will respond by email. I used this contact form to receive the answers to my questions. It took about five hours to receive the answers. The only mention of phone support in the Contact Page is this sentence:
If you have an investment account with us and would like to speak on the phone, please login.
The Wealthfront Cash Account is available nationwide. New customers can open the Cash Account without opening an Investment Account. Accounts can be opened at the Wealthfront Cash page by clicking "Get Started" and "Open a Wealthfront account."
Is the Wealthfront Cash Account as Safe as a Bank Savings Account?
Wealthfront makes the claim that it’s safe. This is an excerpt from Wealthfront’s FAQs:
Is this cash account FDIC insured?
Yes. Your cash account deposits are held at multiple unaffiliated banks to provide up to $1 Million in FDIC insurance per account holder. This means that joint accounts may have up to $2 Million in FDIC insurance. This is 4x the amount of FDIC insurance your standard bank account provides. FDIC insurance covers your funds held in the program banks under any circumstance.
This Wealthfront FAQ lists the following four Program Banks: East West Bank, Associated Bank, TriState Capital Bank and Citibank N.A.
More details about how the FDIC insurance works with the cash account and how the funds are handled are provided in the Wealthfront Cash Sweep Program Disclosure Statement:
The Cash Balance in your Cash Account will be automatically swept within 1 to 3 business days after receipt (not including bank holidays or days on which the New York Stock Exchange is closed, such as Good Friday), into one or more Deposit Accounts established by Wealthfront Brokerage on behalf of you and other customers who participate in the Cash Sweep Program at the Participating Banks.
As you can see, there will be periods when funds are not being held by one of Wealthfront’s program banks. The Disclosure describes how SIPC provides protection during these times:
Until the sweep occurs, your Cash Balance will remain uninvested Free Credit Balances in your Cash Account. Because Wealthfront Brokerage is a member of the Securities Investor Protection Corporation (“SIPC”), our customers are protected up to applicable SIPC limits if Wealthfront Brokerage were to go out of business and there were customer securities or funds unaccounted for.
It should be noted that there’s no guarantee that the SIPC will cover a cash management account if the SIPC determines that it’s being used for banking purposes. Below is a relevant excerpt from the SIPC FAQs:
I have a securities account. Isn’t everything in my securities account protected by SIPC?
Not necessarily. In general, SIPC protection is determined on an asset-by-asset basis and extends only to: (1) cash in a customer’s account that is on deposit for the purchase of securities; [...]
This question of SIPC coverage received lots of news coverage in December when the brokerage company Robinhood launched a “Checking & Savings” with a 3% interest rate. Robinhood had claimed this account was covered by SIPC, but the president and CEO of SIPC, Stephen Harbeck, disputed this in media interviews. Harbeck was quoted in this Bloomberg article explaining why SIPC would not protect this Robinhood account:
“The statute that we administer says that we protect money with a brokerage firm that is used for the purchase of securities,” he added. “On Robinhood’s help page, it says that you don’t need to invest to use Robinhood checking and savings, that statement is wrong. If you deposit money for any other purpose, it is not protected.”
After these comments, Robinhood stopped promoting its “Checking & Savings” account, and replaced the mention of this account with the message “Cash management, coming soon.” This message continues as of May 31, 2019.
Even if a brokerage firm is a member of SIPC, it does not guarantee that an account offered by that firm is protected by SIPC. For a cash type of account, the SIPC can decide that an account is not protected.
I can’t say if Wealthfront’s claim of SIPC coverage of its Cash Account is wrong. On its Cash Account webpage, Wealthfront suggests that the account can be used to “save up the cash you need for” things like a “rainy day fund”, “a down payment for a new home” and “saving before you’re ready to invest.” I don’t see any mention that the money deposited is intended to be used for the purchase of securities. In fact, it appears that it’s not even possible to purchase securities using money in the Cash Account. According to this Wealthfront FAQ, they don’t currently provide a way to move money from the Cash Account to the Investment Account:
Can I move money between a Wealthfront Cash Account and Wealthfront Investment Account?
Not yet, but we are working to support internal transfers in the near future. We will let you know as soon as this feature is available.
Based on these issues, I can’t say if the Wealthfront Cash Account has the same level of protection as a savings account or checking account at an FDIC-member bank.
One thing to note is that Wealthfront isn’t a new brokerage firm. According to this 2012 Forbes article, “WealthFront was started in 2008.” Wealthfront is listed at the Financial Industry Regulatory Authority (FINRA) BrokerCheck website. FINRA is an independent, non-governmental regulator for all securities firms doing business with the public in the U.S. According to this FINRA BrokerCheck page, Wealthfront Brokerage received SEC registration and FINRA registration in 2010. The SEC noted that according “to its Form ADV, as of August 16, 2018, Wealthfront had over $11 billion in assets under management.” Wealthfront currently lists assets under management at $13 billion.
Wealthfront received some bad publicity in December from an SEC enforcement action and fine. According to this Reuters article, an “SEC order alleged that Wealthfront, one of the largest independent robo-advisers, had made false statements about a tax-loss harvesting strategy it offered to clients.” Full details are available in this SEC enforcement action document.
How the Wealthfront Cash Account Compares
When compared to the Savings Accounts and Money Market Accounts tracked by DepositAccounts.com that are available nationwide, Wealthfront Cash Account currently ranks second, regardless of minimum balance requirements.
|Interest Rate||Account Name||Credit Union/Bank|
|2.53% APY||Eagle Premium Savings ($100k min/no max)||Susquehanna Community Bank|
|2.51% APY||Cash Account ($1 min/no max)||Wealthfront Brokerage|
|2.50% APY||High Yield Money Market (no min/$3m max)||Western State Bank|
|2.50% APY||eAccess Money Market (no min/$2m max)||Investors eAccess|
|2.50% APY||Savings ($1k min/$500k max)||WebBank|
|2.50% APY||High Dividend Savings ($500 min/no max)||USALLIANCE Financial|
|2.50% APY||High Yield Savings ($25k min/no max)||Customers Bank|
The above rates are accurate as of 5/31/2019.