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CD Investing: Relationship Rate CDs


CD Investing: Relationship Rate CDs

The following is a guest post contributed by Charles Rechlin, a long-time reader and friend of the site. His last guest post covered Loyalty Rewards and Customer Promotions for CD Investors. I would like to thank Charles for sharing more of his valuable experience on personal CD investing.

Notes on Personal CD Investing: Relationship Rate CDs

by Charles Rechlin

Occasionally, while searching for good CD deals, I stumble across a decent yield being offered for a relationship rate CD.

By “relationship rate CD,” I mean a CD carrying a bumped-up or promotional rate for a depositor having another financial relationship with the institution, most often a checking account. Sometimes, the depositor must engage in a certain dollar amount or number of checking account transactions monthly—direct deposits, debit card purchases, bill payments or the like—to get the special rate. (I don’t include CDs of credit unions requiring a share savings or checking account for membership.)

In November 2011, Ken published a Blog Post “Relationship Rates on Your CDs—Worthwhile or Too Much Hassle?” that asked readers whether they had any CDs on which they’d received higher rates for some relationship. Of those responding, 35% replied “yes, worth the higher APY;” 50% answered “not now, but used to;” and 15% indicated “never, too much hassle.”

I didn’t respond. Today, I’m not entirely sure how I’d answer the question.

Simple Checking Account Relationship

To begin with, I have a philosophical aversion to relationship rate CDs.

It’s that, as a CD holder, I view myself as an investor in the bank or credit union, not as a “customer” or “member” receiving a “service.” Taking advantage of checking or other service features to achieve a higher rate is inconsistent with this notion.

Admittedly, my notion is largely inconsistent with banking laws and account documentation. It’s also somewhat hypocritical, given my enthusiasm for customer-directed CD promotions!

I can easily overcome this philosophical objection, however, if the only relationship required is a checking account, even if that checking account carries a low (or no) rate and/or has a reasonable minimum balance requirement to avoid fees—and even if I forfeit the rate advantage by closing the checking account.

I mean, it’s not as if I’m being asked to do something I wouldn’t otherwise do. I regularly establish convenience checking accounts. I use these convenience accounts to collect a CD’s periodic interest payments and balance at maturity. I link these accounts with my primary checking account at Ally Bank, and use Ally’s ACH transfer service to withdraw the funds.

Moreover, the decision to open and maintain a checking account boils down to cost and net yield. Does the minimum balance, low or token rate, or maintenance fee significantly reduce my yield?

So, even a relationship rate requiring only a checking account and nothing more can produce a certain amount of hassle. For me, it’s endurable if the rate is sufficiently favorable.

I’ve owned a handful of CDs having promotional or bumped rates based solely on having a checking account at the institution. For example, in 2010, I opened 36-month promotional CDs (2.50% APY) requiring me to have and keep for the CDs’ terms a Union Bank checking account. This was easy because, for the previous 20 years, I’d had my primary checking account at Union Bank.

I’ve also opened several attractive 2-year, 3-year, and 59-month CDs and IRA CDs at Rabobank that required a checking account, although it was unclear what would have happened to my CD rate had I closed that account. Anyway, it was a free checking account, with no minimum balance, and useful for receiving CD interest.

You must be careful, though, with these checking accounts. The bank or credit union may raise the minimum balance requirement, or impose a new fee, on you during the CD’s term. This happened to me early on at First Republic Bank, which increased my checking account minimum balance requirement after I’d opened the CD. The Truth in Savings Act notice was slipped into a monthly account statement, and I had to scramble to switch to a non-interest-bearing checking account to avoid the new requirement.

You also have to be careful that closing one or more of your CDs at maturity doesn’t affect the minimum balance or maintenance fees imposed on the checking account. For example, in 2014, I opened a small IRA CD at BBVA Compass for which I received a 10 basis point rate bonus as a “preferred customer.” My preferred customer status was based on both having a premium checking account and on the combined balance levels of my CDs and checking account. Once my CD balances are reduced, and I no longer qualify as a preferred customer, I’ll have to convert the checking account to free checking to avoid a maintenance fee. I’ve found nothing in the account documentation, though, that says I’ll lose the bonus on the CD.

So, even a relationship rate requiring only a checking account and nothing more can produce a certain amount of hassle. For me, it’s endurable if the rate is sufficiently favorable.

When bells and whistles are added, though, it’s a stickier wicket.

Checking Account Plus “Bells and Whistles”

I’m much less favorably inclined to open a relationship rate CD when I’m called upon to perform transactions in which I would not otherwise engage—transactions designed to generate income for the institution and/or make it inconvenient for me to close the checking account and move elsewhere.

Such bells and whistles include arranging monthly direct deposits in a minimum amount, using a debit card, writing checks or effecting ACH transactions a certain number of times a month, using the bank or credit union’s bill pay feature each month and/or performing monthly a minimum of ATM transactions.

I hate these sorts of relationship CDs. It’s hard enough to manage a bunch of CDs at multiple banks and credit unions without the added burden of keeping track of useless (to me) service transactions. It makes me less, rather than more, disposed to become a long-term depositor.

I’m much less favorably inclined to open a relationship rate CD when I’m called upon to perform transactions in which I would not otherwise engage

Having said that, I’ve made two exceptions in recent years.

In 2014, San Diego County Credit Union held a “member appreciation” promotion offering a 29-month CD. The rate was a generous 1.74% APY, but members could bump it up to 2% with an “active” checking account. An “active” checking account could be achieved by posting three monthly bill pay, and five monthly debit card, transactions during the 90 days following the CD’s opening.

Because these bells and whistles were sounding for only 90 days, and the checking account had no balance minimum or fees, I went for it, and bumped myself up to 2% APY, which was then locked-in regardless of further use of SDCCU bill pay or debit card features.

More significant, perhaps, is the “relationship” I’ve been required to maintain at First Republic Bank to get (and keep) 25 basis point bumps on some of my CDs. The requirements for a relationship rate bonus have evolved over the years because the bank allows the local branch to set these requirements (presumably within limits) when a CD is opened.

Currently, my relationship involves maintaining a monthly average daily balance of $4,500 in a low-interest checking account, and making one bill payment per month. The required balance is steep, but my CD yields can absorb the cost.

When First Republic recently raised its posted 5-year CD rate to 2% APY, the branch (from which my regular banker for years had departed) said it would allow me only a .10% rate bump, and only if I kept at least a $10,000 checking account balance. I said “thanks, but no thanks.”

How Would I Answer Ken’s 2011 Question Today?

I suppose I’ll look at any relationship CD rate that’s offered to me, but I’m not actively seeking out any, and don’t expect that an acceptable one will materialize any time soon.

So, I guess my answer to Ken’s 2011 question today would lie somewhere between “yes, worth the higher APY” and “not now, but used to.”

Comments
Bozo
Bozo   |     |   Comment #1
"I hate these sorts of relationship CDs. It’s hard enough to manage a bunch of CDs at multiple banks and credit unions without the added burden of keeping track of useless (to me) service transactions. It makes me less, rather than more, disposed to become a long-term depositor."

Charles, this sums up my philosophy as well. I'm a huge fan of "set and forget", both with respect to equities and fixed-income. I remember when rewards checking first came out and was all the rage here at DA. It was like extreme couponing. Folks were opening multiple RCAs, with spreadsheets to keep track (to make sure they complied with the minimum transactions), then obsessed over whether the tracking was correct.
jimbeau
jimbeau   |     |   Comment #2
It's bad enough to keep track of the base share accounts at the CUs I belong to. I'm actually culling the herd now.
  |     |   Comment #3
I never did nor I ever will fall for such schemes. The banks or the CUs will never offer them if they do not make money off of you.
Relationship is a code word for a sucker is biting on the hook.
dollarsncents
dollarsncents   |     |   Comment #4
I believe the intent of "relationship" accounts is to gain long term customers and business, not to lure rate chasers.
Kaight
Kaight   |     |   Comment #5
There was an interval, roughly five years ago, when I was able to obtain multiple CDs from the same financial institution on a relationship rate basis. It was a quarter point rate bump that applied to each CD, so a good bit of money was involved. And by meeting the "relationship" requirement for just one CD, I met the requirement for ALL of them simultaneously.  It was a rather large amount of money taking into account the CD ensemble.

All that is unwinding now, slowly. But I made quite a lot of money for performing "relationship" actions each month which, over time, have become pretty easy and routine. Today I generally avoid relationship situations because I've made a conscious decision not to concentrate so much money into a single financial institution, something I now view as imprudent/dangerous.  But I have no regrets about having done the "relationship" thing in the past.
barry_NY
barry_NY   |     |   Comment #6
The more basic question is: "Why do banks even need consumer deposits?" They can borrow all the reserves that they need on the Federal Open Market, from other banks with excess reserves, at low wholesale rates. Minimal interest, or no interest, accounts are the only accounts that make sense for banks.

They obvisously need, and expect, something else from consumers, in exchange for high interest rates. They expect a large consumer account base to generate banking fees and interest payments.
ChasR
ChasR   |     |   Comment #7
This certainly has been the view of many banks, particularly the too-big-to-fail banks, since Bernanke ruled the Fed, and buying back holding company stock became more important than making loans. The old-fashioned notions of having the stable funding base of long-term CDs to match against fixed-rate liabilities like mortgages and car loans, rather than relying on volatile short-term market funding sources, seems to have been beaten bloody at many banking institutions. Fortunately, it is still alive and well at many credit unions and Internet banks.
ChasR
ChasR   |     |   Comment #8
Correction: Change "fixed-rate liabilities" to "fixed rate loans."
LuvCD
LuvCD   |     |   Comment #9
Relationship banking is where you know your banker, your banker provides references for you, they conduct meet/greet for new branch employees, etc. The banks have decided not to have a relationship...to call it something else is a sham(e).