Digital Bank Savings Accounts Offer Counter to Expected Rate Hikes

Investment advisors looking for a safe place to stash some client cash should look to the Federal Reserve for guidance in 2018.

Why? Because the Fed is set to hike interest rates, possibly several times, this year to keep potential inflation in check.

After raising the benchmark funds rate from 1.25 percent to 1.50 percent in December, six of the 16 members of the Federal Reserve’s Open Markets Committee called for three quarter point hikes in 2018 (four members called for four rate hikes), along with two more similar hikes in 2019.

Overall, the Fed pegs the federal funds rate at 2.7 percent by 2019. It also expects U.S. core inflation to rise from 1.5 percent to 1.9 percent by the end of 2018, and to 2 percent by 2019.

With the stock market losing ground, that rate-hike schedule might be slowed just a bit.

But any upward rate movement should boost the fortunes of U.S. bank savers, who’ve earned short shrift from their money market, certificates of deposit, and other bank savings accounts in the past decade.

“We've seen that the online savings rates tend to move up in line with Federal Reserve rate hikes,” said Adam Jusk, founder and chief executive officer at Proud Money, a finance site that tracks savings and loan rates. “For example, there were rate hikes in June and December of last year, and the rates from most of the banks on our list have increased 0.50 points or very near it during that time.”

Higher Interest Rates

Of the 15 top-rated online savings accounts on Proud Money, all have interest rates higher than 1 percent, and many are more than 1.5 percent, Jusk said.

“Obviously, the yield on even the best online savings account pales in comparison to the returns in the stock and bond markets, but some people want greater liquidity,” he said. “They may also want more security if the soaring stock market has them wary of a sudden correction. For them, an online savings account provides a modest return in exchange for greater security and flexibility.”

For investment advisors and safety-minded clients, an upward shift in interest rates could spell opportunity for cash preservation needs -- if they make the right decisions.

“As interest rates rise, consumers, especially savvy savers, are becoming keenly aware of what the rates are these days,” said Pierre Habis, president of PurePoint Financial in Los Angeles. “But it’s important that all consumers become informed about the savings rates they’re getting. If they’re not earning at least 1 percent on their savings accounts, they’re leaving money on the table.”

PurePoint’s online savings rate is currently 1.6 percent, significantly higher than traditional bank rates. For example, Bank of America’s current savings rate is 0.03 percent. That’s a significant rate gap – one that advisors and clients can exploit.

“Online banks offer a different value proposition than traditional banks,” Habis said. “Online is less expensive to operate, which often translates into higher rates for consumers. Traditional brick-and-mortar banks have a different value proposition, which is also important, but it means their operating costs are higher.”

That’s a formula for higher rates for bank savers.

“The average savings account rate in 2017 increased only 7 percent, but the average internet bank savings rate increased 33 percent,” said Ken Tumin, founding editor of The Bank Deals Blog at DepositAccounts.com. “Without the overhead of branches, Internet banks have always been able to offer much higher interest rates than traditional banks.”

Manage Both Accounts

Based on the history of the last Fed tightening cycle from 2004 to 2006, the rate increases at Internet banks should accelerate and approach the increases of the federal fund rate, Tumin added.

That said, it’s not a good idea for clients to close their regular bank accounts.

“Internet banks make it easy for you to link your existing checking account to their Internet savings account,” Tumin said. “Once linked, you can electronically transfer money between your brick-and-mortar checking account and your Internet savings account.”

The takeaway? Traditional banks are hyper-aware of how much consumer behavior and preferences are changing in every industry as new advances in technology are made.

“As a result, every bank is going to have to evaluate how they plan to stay relevant amidst this changing landscape,” said Habis.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected]