About the intelligent investor
The weekly column of The Intelligent Investor by Jason Zweig has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between good advice and one that only sounds good.”
About Jason Zweig
One of The Wall Street Journal’s top journalists. Author of “Your Money and Your Brain: How Neuroscience Can Help You Get Rich,” and editor of the updated best-selling version of The Wise Investor, which Warren Buffett described as “the best investment book ever written.”
As inflation picks up and the stock market measures, it can certainly be nice to get a good refund on our cash.
This week, the US Department of Employment announced that consumer prices rose by 9.1% in the 12 months ended June. During this period, the return on savings in banks increased to 0.1% from 0.06%. So technically this is a 67% increase, but it is doubtful if you are jumping for joy.
Startups in the field of financial technology, fintech, offer much higher returns on their apps and websites – sometimes 4% or more. But these are not conventional savings accounts, and many of them have complexities or clauses with an asterisk on repayments. So before you jump on what looks on paper to be a tempting return, make sure you have looked at the issue closely.
A bank deposit account is insured by the Federal Deposit Insurance Corporation (FDIC), meaning the U.S. government provides a guarantee that you will not lose up to a quarter of a million dollars in the bank in the event the bank collapses. By federal regulators.
Fintech companies are not always banks and are not always required to comply with the rules that apply to banks. Hence the revelations they publish and their advertising material may give the impression that higher returns are easier to achieve than they really are.
Several fintech sites and apps, including Aspiration, HMBradley, Current, T-Mobile Money and Varo, offer returns ranging from 3% to 5%. But for the most part you will be required to maintain a deposit of a certain size, reach pre-determined spending targets, or do business with companies affiliated with fintech companies.
“Are guaranteed refunds important to you? We’re probably not the place for you.”
One high-yield app, Save, promotes what it calls a “markets savings account.”
Suppose you want to get a better refund on $ 10,000. Save puts the money in the FDIC’s interest-free account at Webster Bank in Stamford, Connecticut. You choose whether to deposit the money for a year, two years or five years.
at that point Save Will create a $ 10,000 exposure to adjusted securities that mimic the returns of a small group of mutual funds, with no dividends.
You will receive all the profits that will be left after the annual commission at the rate of 0.35%, which Save only charges if the refunds are greater than that. And since the principal amount is isolated in a bank account insured by FDIC, you cannot lose money.
Save says the company’s investment strategies achieve annual profits of between 3.72% and 9.48%, after commissions. The company expects that the refunds will be taxed as on long-term capital gains, and not the higher taxes levied on ordinary income that depositors inBanks Pay.
But keep in mind that returns of 3.72% or more are not guaranteed, they are hypothetical. The company detailed what they were supposed to gain from Save’s strategies between January 2006 and January 2021 – a time when these securities portfolios did not yet exist.
“We are not aiming for the moon but for low but steady returns,” said Save CEO Michael Nelskila.
If you withdraw the money early, you may be required to reimburse trading costs and waive some or all of the refunds, although you will always get back the full amount of the deposit you deposited.
Nelskila estimates that the probability of receiving a zero refund on Save’s account is about 15%. So “if it is very important to you that you have guaranteed positive returns, we are probably not the place for you.”
“Top Secret Component and Internal Trading Algorithm”
Another app that guarantees a high return is Fair, which aggressively markets its capital-building product, “Alternative for Savings,” which offers an annual return of 4% (about 0.3% per month).
Until this week, the Fair website claimed that “all you have to do is sit back and watch the profit line in the account grow every month!”.
After claiming to the company’s management that some investors might interpret this as a promise, Fair’s founder Khalid Farah removed this wording from the site. It still says that “Fair Invest returns an annual dividend of 4% to your account every month” – even though it is an aspiration and not a promise.
Fair Invest, the company’s investment advisory body, “does not receive payment for its role” in the capital building account, according to the disclosure on the Fair website. However, another Fair subsidiary retains between 10% and 15% of the return for itself, according to a person familiar with the subject.
This subsidiary invests customers’ money in dividend stocks in the US, by using what Farah defines as “a top secret component and an internal trading algorithm”.
According to Farah, the strategy grew out of his own capital management. “As a wealthy person myself,” he said, “I wanted to expand the solution I found for myself to the rest of the world.” He claims that since these accounts were launched last September, they have reached their return targets each month.
Cemeteries are full of people confused between marketing messages and guarantees
And what if that does not happen? Are they likely to earn much less, or even lose money?
The Fair website states that the company “will make every effort not to pass on losses to customers on their initial investments.” Of course this is a marketing text, not a legally binding undertaking. It is not as safe as the government guarantee against losses received on a bank deposit.
If your capital-building account loses value, attempts to recoup the losses from Fair will make you unsecured creditors of the company.
Farah promises that his $ 350 million private holding company, AMSYS Group, will be able to cover customer losses if necessary.
Maybe it will happen, maybe not, one thing is for sure – the investment cemeteries are full of people confused by marketing messages and guarantees.
In the end, it always pays to worry about getting your money back rather than getting your money back.