It’s no secret: Wealthfront shouldn’t be a financial institution. We’re happy with this as a result of it’s an enormous profit to our shoppers. Selecting to not be a financial institution is what permits us to give you best-in-class merchandise just like the Money Account which are far superior to what a financial institution can provide, so you possibly can develop your long-term wealth simply and conveniently. On this put up, we’ll clarify how Wealthfront’s non-bank standing permits us to ship worth to shoppers in a means that banks typically can’t or received’t.
We don’t have retail branches
Financial institution branches are an enormous a part of the standard financial institution’s enterprise mannequin. Traditionally, branches have been a spot to do issues like discuss to your banker, ship wires, deposit cash, and take out loans. Branches served a goal within the age earlier than smartphones, however they have been and nonetheless are costly to workers and keep.
In line with one estimate, a single financial institution department can value between $600,000 and $800,000 to run yearly, together with again workplace prices. Consequently, every department must generate between $600,000 and $800,000 yearly simply to interrupt even, not to mention flip a revenue. They do that in a number of methods, together with charging account charges and declining to pay you a lot (if any) curiosity in your deposits. Financial institution of America, for instance, has about 68 million retail shoppers (together with small companies) and three,900 retail branches, which works out to 17,436 clients per department. Which means every Financial institution of America department must get between $34 and $46 from you on common every year simply to interrupt even. Be mindful the common value per shopper might be a lot larger at a financial institution with branches that serve fewer individuals.
In the present day, it’s doable to do your whole banking remotely with out the effort of visiting an precise financial institution in individual. That’s why Wealthfront doesn’t have retail branches — and since we solely construct issues we will automate, our again workplace prices are fairly small. We don’t have an antiquated community of pricey retail branches costing us $600,000 to $800,000 every a yr, so we don’t have to get that $34 to $46 (or extra!) from you.
Consequently, we will do two issues that assist your financial savings develop quicker. One, we will pay you much more curiosity in your deposits as an alternative of maintaining all of it for ourselves and our branches. And two, we will keep away from charging you any account charges like overdraft charges, switch charges, and month-to-month upkeep charges. This implies your cash grows a lot quicker at Wealthfront than it might in a checking account, and it is protected against account charges that eat away at your wealth.
We’re not regulated like a financial institution
It in all probability received’t shock you to study that banks are extremely regulated. Many of those rules are supposed to maintain your cash protected, which is an efficient factor. However sadly, some financial institution rules can have unfavorable unwanted side effects. It’s because financial institution regulators are charged with defending the general stability of the monetary system, not making certain buyer satisfaction. Consequently, regulators are very a lot targeted on the profitability of banks and the predictability of their enterprise. This impacts clients in two methods. One, banks can face strain from regulators to pay much less curiosity on deposits to allow them to earn larger income. And two, banks are additionally constrained of their capacity to construct new merchandise, as a result of experimentation with new merchandise represents threat within the eyes of regulators.
Let’s take a look at an instance of a particular financial institution regulation for example how they will work in opposition to clients. You will have seen that some financial savings accounts solely permit six transfers monthly earlier than charging a price. This seemingly arbitrary restrict is included in provisions of Regulation D. Till they have been quickly suspended in early 2020, these provisions restricted you to 6 transfers from a financial savings account every month. Consequently, you needed to have each a financial savings and a checking account for those who needed to earn the upper curiosity sometimes related to a financial savings account and still have a checking account for each day transactions. Although the rule hasn’t been lively for over two years, some banks proceed to cost “extra exercise” charges for exceeding six transfers. As of the time of publication, Regulation D’s transaction limits stay suspended however the change has nonetheless not been made closing which suggests it may come again. However as a result of Wealthfront shouldn’t be a financial institution, we’ve been capable of provide our Money Account with limitless transfers from the beginning. Wealthfront brokers shopper deposits to “demand” accounts at accomplice banks (extra on that under) which, like checking accounts, don’t have transaction limits. That means shopper transfers aren’t restricted like they’d be in financial savings accounts below Regulation D.
This is only one instance, however points like these are precisely why Wealthfront hasn’t taken steps to turn into a financial institution — lots of the constraints on banks run counter to placing the pursuits of our shoppers first. We wish to preserve constructing revolutionary merchandise like our Money Account, which provides best-in-class automation options so you possibly can manage your financial savings into classes, monitor your progress in opposition to your objectives, and make investments your cash inside minutes throughout market hours. And we don’t wish to decide to a marketing strategy that places strain on us to revenue from shoppers; we wish to pay you loads of curiosity (and we do — our present APY of three.80% is many occasions the nationwide common supplied by financial savings accounts).
We dealer our deposits to accomplice banks
A closing key distinction between Wealthfront and banks is we dealer our deposits to accomplice banks as an alternative of holding them ourselves. (Banks usually desire not to do that, because it’s typically extra worthwhile for them to carry shopper deposits immediately.) The truth that Wealthfront brokers its deposits has two key advantages for you.
1. You get extra FDIC insurance coverage
Once you deposit your cash at a financial institution, it’s lined by what’s often called FDIC insurance coverage. FDIC stands for Federal Deposit Insurance coverage Company, and it was based in 1933 as an unbiased company of the U.S. authorities to guard money held in financial institution accounts.
FDIC insurance coverage covers as much as $250,000 per depositor, per-FDIC insured financial institution, per account class. However with a Wealthfront Money Account, your cash is perhaps deposited at as much as eight of our accomplice banks at any given time, which suggests you truly get 8x the common quantity of FDIC insurance coverage, or as much as $2 million in your Money Account as an alternative of the $250,000 you’d get in a single account at a daily financial institution. You probably have a joint Money Account, you rise up to $4 million in FDIC insurance coverage.
Generally individuals ask us how their funds are protected after they’re in transit to certainly one of Wealthfront’s accomplice banks. Generally, this doesn’t come up as a result of we sweep your money to our accomplice banks on the identical day we obtain it. However within the much less seemingly occasion your cash takes a day or two to reach, your funds are nonetheless protected. That’s as a result of our Money Account is obtainable by Wealthfront Brokerage, a federally registered broker-dealer and due to this fact consists of Securities Investor Safety Company or SIPC insurance coverage, which covers as much as $250,000 of your money whereas it’s in transit to a accomplice financial institution.
With all of this insurance coverage, your cash is arguably a lot safer in a Wealthfront Money Account than it might be at a financial institution.
2. You profit from wholesale charges
The second advantage of brokering our deposits is that Wealthfront can reap the benefits of wholesale rates of interest, which suggests you earn extra curiosity. Banks are required by regulators to keep up an outlined share of mortgage worth in deposits. When mortgage demand spikes, banks sometimes want extra deposits to fulfill that demand. To draw these deposits, banks typically want to supply the next rate of interest, a minimum of for a brief time frame. Nevertheless it’s tough to quickly provide larger charges to customers as a result of they are going to be dissatisfied by the speed lower as soon as the financial institution has attracted the mandatory deposits. To keep away from this downside, banks provide larger rates of interest on the wholesale market to broker-dealers like Wealthfront. The good thing about providing the next charge on the wholesale market is a financial institution’s client depositors by no means see that their financial institution supplied the next charge. Wealthfront takes benefit of those larger wholesale charges to supply our shoppers the next APY on the Wealthfront Money Account.
We navigate relationships with our accomplice banks so our shoppers can profit from excessive wholesale charges each time doable. We work tirelessly to make sure we’re getting the very best charges we will in your money. We are able to then cross much more curiosity alongside to you so your money works more durable for you with no additional effort.
Wealthfront is best than a financial institution
At Wealthfront, we’re constructing a monetary system that favors individuals, not establishments. The truth that we aren’t a financial institution (i.e. don’t have a financial institution constitution and because of this aren’t regulated by financial institution regulators) is an enormous a part of how we’re capable of ship on that mission, and it’s how we constructed a Money Account that gives all of the banking options you want with out the effort and price of an precise checking account.
Whether or not you’re saving up for an emergency fund, constructing a down cost, or simply maintaining cash helpful for short-term objectives and bills, the Wealthfront Money Account is a perfect dwelling in your money. With a excessive APY that’s designed to earn you extra, as much as $2 million in FDIC insurance coverage, and no account charges, your cash works more durable in a Money Account. The Money Account additionally has best-in-class automation options so you possibly can kind your financial savings into classes, measure progress in opposition to your monetary objectives, and make investments your cash inside minutes throughout market hours while you’re able to construct long-term wealth. And because you get entry to a debit card and 19,000 free ATMs, your money is all the time out there in your phrases. In brief, the Wealthfront Money Account isn’t a checking account — it’s one thing a lot, a lot better.