Robo-advisors Wealthfront and Betterment both recently announced eye-popping interest rates on cash accounts of 2.57% and 2.69%, respectively, 25 to 27 times the national average APY of 0.01%.
Those are some of the highest rates around. But savers should be aware that the accounts are not technically savings accounts, though the Betterment Everyday Savings and Wealthfront’s cash account are FDIC-insured up to $1 million.
Here’s why that matters. Wealthfront and Betterment are not chartered as banks — Betterment, for example, is regulated by the Securities and Exchange Commission as a broker-dealer, and Wealthfront is regulated as an investment advisor. They can’t offer FDIC insurance on their high-yield savings products, Matthew Goldberg, analyst at Bankrate.com, tells CNBC Make It. Rather, they partner with FDIC-insured banks, which actually hold their clients’ money.
Betterment’s savings account operates with a handful of “Program Banks,” including CitiBank and Valley National Bank, though these relationships are subject to change at any time. Savers are responsible for monitoring their assets at the banks and ensuring they do not exceed the $250,000 FDIC limit, and they can opt out of any of the partner banks holding their money.
Goldberg says it’s imperative for savers interested in the accounts to do their research before switching and to understand which program bank will hold their money.
It’s especially important to understand that there may be a period of one to two days in which your money is not insured as it’s transferred to the partner banks, Goldberg says. After making a deposit, follow up with Betterment or Wealthfront a few days later to ensure your money was properly transferred to the partner bank.
And if you want to withdraw money, you might have to wait a day or two. Unlike with a traditional savings account, there are no limits on withdrawals from Betterment’s account and neither company charges customers any fees.
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These accounts, like high-yield savings accounts offered by online banks like Ally, offer variable interest rates which can change at any time. The Federal Reserve is expected to cut interest rates at its meeting next week, and savings account rates may decrease as a result.
“We don’t know if they will offer a consistent yield or if they could cut it almost immediately,” Goldberg says.
Betterment announced its 2.69% APY offer will be locked in through the end of 2019 if customers sign up for its still-to-be-released Everyday Checking product; otherwise, the APY is currently 2.43%. Beyond that, it’s uncertain what the rate will be. Goldberg says it’s a good idea to watch how the rates fluctuate over time and compare that to more established high-yield products before opening an account.
Regardless of whether a saver chooses Wealthfront or Betterment or sticks with an online bank like Ally, Goldberg says there’s no reason not to be benefiting from a high yield savings account.
“As long as you’re earning at least 2% APY, you’re in a good spot,” he says.
Betterment’s announcement of its checking product has drawn the attention of the Financial Industry Regulatory Authority, or FINRA, CNBC reported. Regulators are paying extra attention to fintech companies after Robinhood, a stock trading app, attempted to launch a checking and savings account with 3% interest rates in December 2018. The company quickly came under scrutiny for potentially misleading investors.
