Should You Save Where You Invest?

Banks have aroused the anger of the entire nation. On one hand, they pay their savers next to nothing in interest. On the other, they're increasingly reliant on fees and have earned a reputation for being tight-fisted about making loans and serving their communities. In response, customers have fled big banks in droves, in favor of locally owned financial institutions.

But not everyone is moving their money to credit unions or community banks. Increasingly, brokerage companies are winning the war to get your cash -- and they're doing it by giving you the services that you want at a more reasonable price.

Why banks are losing out
If you wonder why some customers are fed up with banks, you don't have to go back very far to find some good reasons. Just last fall, Bank of America (NYSE: BAC  ) led the charge to add new fees on debit-card customers, perhaps in an attempt to make up for some of the lost income it and other banks suffered from debit-fee legislation that set limits on how much they could charge per transaction. Wells Fargo (NYSE: WFC  ) looked at similar fees. Although both institutions later reversed themselves, the episode only underscored how badly banks want to boost their fee-based income.

Nor are banks relying solely on plastic to get more money from customers. Citigroup (NYSE: C  ) raised monthly fees on basic checking accounts from $8 to $10 for those who don't keep a hefty minimum balance in their account.

Are brokers the answer?
By contrast, you can find more brokers offering bank accounts with far more generous terms. As an article in the Wall Street Journal over the weekend discussed, Schwab (NYSE: SCHW  ) , Scottrade, Fidelity, and TD AMERITRADE have all taken steps to offer banking services to customers. TD AMERITRADE provides online bill payment and rebates on ATM fees, while Schwab is offering checking accounts and other services at no fee.

One thing to watch out for, though, is whether your money gets the same FDIC insurance that banks provide. At Fidelity, its Cash Management Account is held at traditional banks, which provide FDIC coverage to its clients. Schwab, Scottrade, and T. Rowe Price are among those brokers that have established affiliate banks to get FDIC coverage.

When broker-banking goes wrong
For investors, combining brokerage and banking services may raise concerns. For E*TRADE Financial (Nasdaq: ETFC  ) , many of its problems during the financial crisis came because its banking unit made mortgage loans that ended up creating huge losses from delinquencies. By taking on banking customers, a brokerage company assumes credit risk that it may not be equipped to handle.

But from a customer standpoint, the deals can be lucrative. TIAA-CREF offers a savings account with a rate of 1.24% -- much higher than you'll find at most banks. Similarly, if you pay big fees for ATM use or monthly service charges, then simply avoiding those costs can save you a bundle.

Go for it
Most people aren't in any hurry to have a briefcase full of checkbooks and a bunch of savings accounts to track. In banking, the one-stop shop has a lot of appeal, and having multiple accounts can make your finances a lot more complicated. But often, getting the best deal can easily be worth it. If you incur a lot of banking fees, it doesn't take long for a no-fee or low-fee account to start paying big dividends.

In addition, an FDIC-insured bank account can also solve a problem with keeping brokerage cash in money market funds. Those funds aren't insured, leaving you with risk you may not realize and definitely don't want.

If you're fed up with your bank, take a look at what your broker has to offer. The advantages may make it worth making the leap.

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Fool contributor Dan Caplinger has seen his number of bank accounts rise and fall over the years. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Citigroup, Wells Fargo, and Bank of America, as well as having created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Schwab, TD AMERITRADE, and Wells Fargo, along with creating a bull put spread position in TD AMERITRADE. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can bank on The Fool's disclosure policy.


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  • Report this Comment On May 08, 2012, at 6:03 PM, jssiegel wrote:

    Or invest where you save? Bank of America offers brokerage services through their Merrill Lynch division, with a number of free trades per month. It depends on what your monetary habits are - run the numbers for your own situation.

  • Report this Comment On May 09, 2012, at 7:21 PM, Gfhughe5 wrote:

    My investment and banking accounts are at Fidelity,

    and their service is super in my opinion. Zero fees as well. Trades are $7.95 for any buy which is essentially free. (Careful buy/sell limits save far more than that fee.) FDIC insured too. Their money funds are at low interest rates like banks, but it's easy to keep any significant money in equities with monthly or quarterly dividends of 6%+ annually and move it around when needed.

    My wife has a Bank of America household accountant and I wire transfer into it monthly. Fidelity lets me wire transfer into it automatically or manually through its web site. Zero fees as well.

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