Hoarding cash? Don’t swing at every yield pitch

Photo: AP
Photo: AP

Summary

Fintech apps are offering outsize returns on your cash. A look under the hood shows their flashy marketing can hide potential pitfalls, and you won’t always get the same safeguards a regular bank offers.

With inflation raging and the stock market staggering, it sure would be nice to get a decent return on your cash.

The Labor Department said this week that consumer prices rose 9.1% in the 12 months ended in June. Over the same period, the yield on bank savings accounts increased to 0.1% from 0.06%. Yes, technically that’s 67% higher, but I doubt you’re jumping up and down for joy.

Financial-technology, or fintech, startups are offering much higher yields on their apps and websites—often 4% and up. These aren’t conventional savings accounts, though, and many have caveats and complexities. Before you grab what sounds like a tempting yield, make sure you take a closer look.

A bank deposit is insured by the Federal Deposit Insurance Corp., meaning the U.S. government guarantees that you won’t lose money up to $250,000 per account if the bank goes bust. Rates—as piddly as they are—have to be disclosed in precise terms set by federal regulators.

Fintech companies aren’t always banks and don’t always have to follow the same rules banks do. Their disclosures and marketing can make high yields sound like more of a cinch than they are.

Various fintech websites and apps, including Aspiration, HMBradley, Current, T-Mobile Money and Varo, offer rates of 3% to 5%. At most of them, though, you must maintain specific account sizes, hit spending targets or do business with affiliated companies.

One high-yield app, Save, is promoting what it calls a “Market Savings Account."

Say you want to earn a higher return on $10,000.

Save will put the $10,000 in a non-interest-bearing, FDIC-insured savings account at Stamford, Conn.-based Webster Bank. You choose whether to commit your money for one, two or five years.

Save then will create $10,000 of exposure to customized securities that replicate the returns of a basket of exchange-traded funds, without dividends.

You’ll earn any gains after Save’s 0.35% annual fee (which the firm charges only if returns exceed that amount). Because your principal will be sequestered in an FDIC-insured bank account, you can’t lose money.

Save says its investment strategies have average annual gains between 3.72% and 9.48% after fees. The firm expects your returns to be taxed at long-term capital-gains rates rather than the higher ordinary-income rates on bank interest.

However, those returns of 3.72% and up aren’t guaranteed. They’re hypothetical. They report what Save’s strategies would have earned between January 2006 and January 2021—a period when those portfolios didn’t exist yet.

“We’re not aiming for the moon but for low stable returns," says Save’s chief executive, Michael Nelskyla. “We try to capture returns in most market scenarios, but to have positive returns in all scenarios is impossible."

If you withdraw early, you may incur trading costs and forfeit some or all of your gains, although you will always get back the full amount of your deposit.

Mr. Nelskyla estimates the probability of earning a zero return on a Save account at about 15%. “If it’s very important to you to have positive yields and returns guaranteed," he says, “then we’re not the place for you to be."

Another high-yield app, Fair, aggressively markets its Wealth Building Account, a “savings alternative" offering a 4% annual yield. (That’s about 0.3% per month.)

Until this week, Fair’s website claimed that “All you need to do is sit back and watch your Wealth Building Account balance grow every month!"

After I asked whether some investors might interpret that as a sure thing, Fair’s founder, Khalid Parekh, removed the wording.

The website still says, “Fair Invest returns 4% annual dividends to your account every month"—even though that’s a goal, not a guarantee.

Fair Invest, the firm’s investment adviser, “does not take any compensation for its role as managers" of the Wealth Building Account, according to a disclosure on Fair’s website. However, another affiliate of Fair keeps 10% to 15% of the accounts’ yield for itself, says a person familiar with the matter.

A Fair affiliate invests customers’ money in dividend-paying U.S. stocks, using what Mr. Parekh calls “a very secret sauce and internal trading algorithm."

Mr. Parekh says the strategy grew out of managing his own capital. “Being an individually wealthy person," he says, “I wanted to extend the solution that I found for myself to the world."

So far, since the accounts launched last September, they have hit their return targets every month, he says.

What if they don’t? Couldn’t they earn a lot less—or even lose money?

Fair’s website says the firm “will make its best efforts to not transfer losses to Fair members on their initial investments." That’s boilerplate, not a legally binding commitment. It falls far short of the government guarantee against loss you get in a bank account.

If your Wealth Building Account loses value, your efforts to reclaim your losses from Fair would make you an unsecured creditor of the firm.

Mr. Parekh says a private holding company he owns, AMSYS Group, is valued at $350 million and ultimately would be able to cover customers’ losses.

Maybe it would; maybe it wouldn’t. One thing is certain: The graveyards of investing are full of people who mistook marketing messages for guarantees.

In the end, it always pays to care more about the return of your money than the return on your money.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie