Your Broker as Your Banker
As the Internet has changed the landscape of the brokerage industry, it has also led to some changes in the way that brokers function. In particular, once the cost of stock trades dropped to deep-discount levels, brokerages began to offer other services, possibly in an attempt to develop other revenue streams, but certainly as a way to attract customers. And customers, for their part, have begun to investigate whether their broker can now serve the functions that were previously carried out by their banker. Does it now make sense to dump your bank completely and rely exclusively on your broker?
Let's look first at some of the services offered by brokerages. You can write checks on your account and you can use a VISA debit card at any ATM. You have your securities (stock) accounts there, so there's a nice feeling of consolidation. Come tax time, assuming that your broker is online, you've already got all your securities information -- no more asking a brokerage's secretary to pull confirmation slips out of their files since you accidentally used yours to plug that radiator leak back in December.
Some brokerages also allow you to borrow against your holdings. This means that you can use your margin account as a loan -- the interest rate is usually lower than 10%, which beats the heck out of credit card interest rates. Important note: Before borrowing against your securities, you should know what you're doing, and you shouldn't do too much of it. If the value of your stocks plunges, and you've overextended yourself by borrowing too much, you might get the dreaded "margin call" -- meaning that you have to sell some stock (or deposit cash) in order to keep the requisite amount of cash in your account. Fools who want to be able to invest for the long term want to avoid this situation at all costs. So if you do borrow from your margin account, do so judiciously. A good rule of thumb is that you should not borrow more than 10-15% of the value of your portfolio.
If the checking account offered is, in fact, a money market account, then you earn higher interest than you would at a bank. The brokers will be quick to tell you that you get free checks, unlimited cash withdrawals with your ATM/VISA check card, and that you incur no fees for purchases made with that card.
What's the catch? There are a few, and the first few are awfully similar to those we've already seen in relation to Internet banking:
- ATM fees. They don't have networks, so you're going to have to pay the ATM's owner plus, possibly, a fee to your brokerage's banking sponsor. (That is, since the brokerage may not itself be a bank, it may partner with a bank to provide this service, and that bank may add a fee.) However, this is in the process of changing. Charles Schwab has just started an account that reimburses ATM charges. The catch? You've got to maintain a $100,000 minimum account balance. Watch for this minimum to come down as competition increases.
- You can't just drop by a branch to deposit checks.
- They may not accept a check written to you from someone else (i.e., not a paycheck or a Social Security payment).
- They may or may not allow automatic bill paying. If they do, you may need to do it with a touch-tone telephone instead of through the Internet. And they may well charge something like $3 a month for this service.
- They may not be set up to return your canceled checks to you. Instead, they may provide you with a checkbook with the old "press hard to make a carbon copy" technology. If you do need a copy of a canceled check, you can request one -- for a fee.
- There may be fees for various services. For instance, you may be charged if your account balance -- combination of cash and securities -- falls below a certain level, and there is wide variation in just what that level is. In addition, there is a wide variation in the amount of your minimum investment. It may be $2,000 or $20,000 or higher, and there can be a great deal of disparity in terms of what you'll be charged if your account sinks below that level. In addition there may be an annual fee, an ATM usage fee (even for using the broker's "own" ATMs), fees for mutual fund transactions, and substantial variation in fees for trading shares. So you'll want to do some shopping when it comes time to choose a broker as banker.
In sum: If you like the idea of consolidating your investments with your daily checking needs, a cash management account from your discount broker could be a good solution. If you find the right discount broker with the right services and few fees, the convenience could be well worth it. You will probably, though, still need a local bank account to clear checks through, and also as a lifeline bank in case you need a certified or registered check.