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Should You Switch to a Brokerage Checking Account?

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.

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Paoli   |     |   Comment #1
Maybe it's just me, but I would never use my brokerage checking accounts for regular purposes.  I like to have my regular checking with a local bank where I can get to personally and speak person to person if I have a problem.  I don't get basically any interest from the local checking but not having to do the debit etc. thing is better for me.  I look at my brokerage checkings as only to use for special purposes and I rarely have ever written a check on one.  They don't check me to have them and if they did, I would cancel them.
Mike (Anonymous)
Mike (Anonymous)   |     |   Comment #2
For 10 years, my primary checking account has been a brokerage account at Fidelity, where I also have all my investments.  (I've been retired the last 6 years.)  It's worked perfectly:  no ATM fees, fast ACH in and out, billpay when needed, etc. 

P.S.  What are these "checks" you speak of? :-)
Paoli   |     |   Comment #3
Mike:  If you are referring to my post, I made a typo in the last sentence.  I meant to type "they don't charge me to have them".  Sorry about that.   I'm so glad having your checking with Fidelity works for you as well as it does.    This is just a personal thing my not using Fidelity for regular checking.  Thanks for catching my error.
Anonymous   |     |   Comment #4
Hey Paoli, I thought you were against investing in the markets.  You have talked about investing in only CDs at various banks. 
Anonymous   |     |   Comment #5
I have a checking account at Chase.  We direct deposit our paychecks so we pay no fees.  I find the people that work at banks useless.  I deposit any checks at the ATM.  It is easier .. I just put in my card, pin, press deposit checks and slide in the checks.  Yo can stack 20 checks.  No lines and no slips to fill out. Can do 24x7. Even gives you a copy of the check(s) deposited.  I read in WSJ that they have tellers you can contact via ATM's at some CU's.  You see them and they see you.  Can allow various transactions or provide help.  Banks also have phone assistance some 24x7.  The only thing I rarely need is a signature gurantee.  I haven't been inside a bank brach in 8 months and that was to deposit a check.   Once I started using the ATM to deposit checks you don't go back.  You can even deposit cash at the ATM.  Haven't tried that but O believe copies the bills you deposit. 
Paoli   |     |   Comment #6
Hey #4.  I don't invest in the markets any longer.  I had a mutual fund for years but when it started losing thousands of dollars on me, I sold it and got out before I lost more.  After that, I decided "only" to stay with CDs.  My DP has rollover IRAs with Fidelity and others and I am in charge of them.  I only keep them in their CDs.  Their rates were pretty good for years but this year when a CD matured, the rate was terrible.  I still found one paying my needed 2% for 6 years and went with that.  You see, I set an interest rate which I need to get and at this time even tho 2% seems trash, it was better than letting it sit at 0.20 %.  We do what we have to do for our own purposes.  I have to laugh because whenever I call Fidelity for a CD they have to read me their "Bible" of disclosures and get me to agree that "they" did not choose this product for the plan. :)  I just wish they would come up with a bit higher rates for their CDs!
Mike (Anonymous)
Mike (Anonymous)   |     |   Comment #7
Paoli, I wasn't correcting your post, I was trying to be funny -- I was facetiously asking "what are checks?" meaning, how old-fashioned, who writes paper checks on a checking account any more?  :-)

I don't think there's any 'right' and 'wrong' on this issue, everyone should do what they feel comfortable with.
Paoli   |     |   Comment #8
Mike:  You must be of the younger generation concerning paper checks.  I have a beloved DD who has a checking account but literally refuses to use paper checks.  She seems to think they are archaic and a waste of time.  She preferes ATMs for everything.  I only used an ATM once in Paris on a vacation and after what happened, I refused to ever use them again.  I was trying to get $400.00 out and my finger must have nervously hit another zero.  It churned out $4000.00 in francs to me!  I had to find the nearest money exchange to get American dollars for the $4,000.00 in francs and only remember I lost money on the exchange!  I developed an abnormal fear of ATMs and never used one again even in the US!   Give me my good ole paper checks any day!  You youngins can play with your ATMs! :) 
jep1960   |     |   Comment #11
I thnk these brokerage accounts are pretty much useless. It is true you get free printed checks, and refund of ATM fees, but I get that thru Provident Credit Union and I get 2.26% interest up to 25K balance for just having an ACH debit or credit to the account and 10 debit card transactions, both of those "requirements" are VERY easy to do! Plus, Provident keeps track of those requirements and shows you if you have completed them or not. Getting less than 1% at these places is a bad deal.