Despite the fact robo-advisors have only been around since about 2008, they’ve rapidly gained in popularity. Though virtually all offer basic automated investment services, many have been expanding into other financial products. Some are even working on moving toward becoming full-service financial platforms.
Robo-advisors are adding high interest savings options to go along with your investments.
GettyOne of the newest product offerings is robo-advisor savings accounts. This may seem like a serious departure for investment platforms that heavily advertise their simplicity.
But for most investors, having some type of high interest savings option is an important part of an overall investment strategy. Robo-advisors are fast becoming aware of that reality, and reacting accordingly.
The interest rates they pay may not be quite at the levels of high-yield online bank accounts, but they come pretty close. Customers may be willing to sacrifice a little bit on the interest rate side in favor of keeping their savings and investments with the same institution.
At least some robo-advisors are betting on it. We should reasonably expect more to follow.
The Advantages of Robo-Advisor Savings Accounts
When robo-advisors first began, there were serious questions about the whole concept of automated investing. Those concerns have long since disappeared, and the industry has been growing rapidly.
But why should investors also want to hold savings with a robo-advisor?
Save and invest on one platform. One of the major advantages to high-yield savings accounts offered by robo-advisors is you can hold your savings where you invest your money. That will avoid the need to maintain distinct accounts with two separate providers, such as a robo-advisor for investments, and a local or online bank for your savings. On a more practical level, it’ll make it much easier to move money between the two accounts.
Having a risk-free investment option. A savings account will give investors the ability to move part of their portfolio into safe, high interest investments when they prefer to reduce their exposure to stocks and bonds, both of which have the potential to lose principal value.
Liquidity. ThoughCD's may pay higher interest rates, you’ll have to pay a penalty to redeem your money before the certificate matures. Since robo-advisors hold your money in a savings account, you’re free to withdraw some or all the funds in the account at any time, penalty-free.
No limit on withdrawals. Bank savings accounts and money market accounts limit the number of withdrawals you can make to no more than six per month. This is because these accounts are regulated by federal Regulation D. Since they’re not banks, robo-advisors aren’t bound by the regulation. You can make as many withdrawals as you like.
The Disadvantage of Robo-Advisor Savings Accounts
There is one caveat going forward: Since they’re not banks, robo-advisor savings accounts may not covered by FDIC insurance. You’ll need to check with each individual robo-advisor to determine if they offer FDIC coverage.
However, since they’re part of investment accounts, robo-advisor savings accounts are covered by the Security Investors Protection Corporation (SIPC). It covers each investor’s account for up to $500,000 in securities and cash, including up to $250,000 in cash alone. (The coverage is for broker failure, and not losses due to market factors.)
Robo-Advisors Offering Savings Accounts
So far, only two robo-advisors are offering a savings account type option. But those two robo-advisors have a history of setting the tone for the rest of the industry.
Betterment
Betterment pioneered robo-advising back in 2008. It’s since grown to become the largest independent robo-advisor in the industry, and perhaps the most popular. Betterment not only manages investments, but they’ve also expanded their menu of service offerings. On larger accounts, they’re even offering financial planning services.
But one of their new offerings is their savings account option. Called Smart Saver, the program enables Betterment to compete with high-yield online savings banks for high interest savings accounts. The account is available to any Betterment investor.
As of May 14, Smart Saver is advertising a rate of 2.15% annual percentage yield (APY) on all balances. This rate of return easily outperforms interest rates averaging 0.10% on savings accounts and 0.18% on money markets accounts at banks nationwide.
Smart Saver is able to pay higher interest than local banks because the funds are invested in short-term bonds. These not only pay higher rates than bank savings accounts, but they’re also very low risk.
Smart Saver accounts contain the following investment mix:
- 80% U.S. short-term Treasury bonds, invested with iShares Short Treasury Bond ETF (SHV), and
- 20% U.S. short-term investment grade bonds, invested with iShares Short Maturity Bond ETF (NEAR).
The very short-term nature of the underlying securities reduces principal risk to a minimum, while the interest rates paid are well above what’s currently being offered by most banks.
There’s an additional advantage to the investment strategy.
The 80% invested in US short-term Treasury bonds pays interest exempt from state income taxes. This will be particularly valuable for investors who live in high tax states. This is a feature banks can’t provide.
What’s more, the investment methodology means Smart Saver can provide consistent interest income levels. Banks will sometimes offer temporary promotional high rates to attract depositors. But once the promotion ends, the yield will return to regular bank savings rates.
Wealthfront
Wealthfront’s savings option is referred to as the Wealthfront Cash Account. Like Betterment’s Smart Saver account, it enables you to earn high interest on the savings portion of your investment portfolio.
The interest rate being paid on the Cash Account is 2.29% APY as of May 14, 2019, which is many times higher than rates being offered by local banks. Unlike Betterment's Smart Saver, the interest rate does not fluctuate. And since the money is held in bank investments, there is no risk of loss on your principal. But like interest paid on Betterment’s Smart Saver account, it’s not a promotional rate. Interest accrues daily, and is credited to your account monthly.
You can open a Wealthfront Cash Account with as little as $1, and there are no fees for maintaining the account, including monthly fees or withdrawal fees. The Cash Account is available to all customers, not just existing Wealthfront investors.
A major positive with Wealthfront Cash Account is your funds are covered by FDIC insurance. In fact, your account will be covered for up to $1 million. This is because the account is invested through four separate banks, including:
- East West Bank
- Associated Bank
- TriState Capital Bank
- Citibank N.A.
One negative with the account is it currently lacks the ability to transfer money to and from your investment account. But Wealthfront promises this limitation will be eliminated soon.
And given the program is so new, Wealthfront is already planning future enhancements. These include offering a debit card, ATM access, direct deposit, bill paying, checks and mobile deposits.
Apparently, Wealthfront’s ultimate plan is to get you to sever your relationship with your bank altogether. With more than $1 billion in Cash Account balances already, it looks like that's already happening.
Will Other Robo-Advisors Jump on the Savings Account Bandwagon?
In the short space of time robo-advisors have been in existence, Betterment and Wealthfront have been in the forefront of new developments at nearly every turn. But generally speaking, whatever Betterment and Wealthfront roll out, other robo-advisors soon follow. We should expect to see several robo-advisors introduce their own savings-type options.
Last December, the commission-free trading platform Robinhood announced their own savings option, complete with a 3% interest rate and no-fee checking. However, as reported by Forbes contributor, Ron Shevlin in January, the offer was quickly withdrawn when the company came under scrutiny from federal officials, for claiming SIPC protection for the accounts, when none had apparently been applied for.
But with that said, Robinhood continues to report “Cash management, coming soon” on their homepage. We’ll have to wait and see how that plays out.
It remains to be seen if Robinhood will make good on its December offer. But whether it does or not, the need to compete with Wealthfront and Betterment – as well as high-yield online banks – is likely to cause more robo-advisors to offer a credible savings option.
This is an investment development that’s only begun in the past few months. If the forward motion trend of the robo-advisor industry in the past is any indication, millions may soon be doing their savings with these platforms, right along side their investments.
