This past weekend, Barron's took another shot at Robinhood and a handful of financial technology startups that have drawn the ire of regulators and consumers in their entry in to the savings and money market space. Their article, "Fintech Takes the High Road, Only to Trip Up," tells us, "From hawking shoddy mortgage securities to nickel-and-diming retail customers, banks have squandered the public's trust over the past decade. Financial-technology start-ups have seized on those failures, making it cheaper and easier to transfer money or invest in stocks even if you don't have much money. These young companies not only have better technology than the entrenched giants, but they pitch themselves to customers as being more ethical, as well. Now, some of that good will has been erased because of missteps by promising fintech companies. Will the new guard be any different than the old guard?" (See Crane Data's Dec. 23 News, "Robinhood Withdraws 3 Percent Offer; MF Assets Stay Over $3 Trillion.")
It explains, "Robinhood, a start-up that offers no-fee stock and options trading, came out with a product on Dec. 13 that took direct aim at penny-pinching banks -- 'checking and savings' accounts that yield 3%. It promised free ATM withdrawals at 75,000 locations, and no minimum balances or other gotchas. But these were not checking and savings accounts as commonly understood."
Barron's continues, "Robinhood is a broker, not a bank, so they were what is known as cash management accounts, a common product offered by traditional firms like Fidelity. Such accounts tend to be protected by the Securities Investor Protection Corporation, or SIPC, a nonprofit member organization funded by brokers, not the Federal Deposit Insurance Corporation, or FDIC. Robinhood said the products would be insured by SIPC."
They state, "In this case, however, the SIPC was unwilling to insure the assets. Stephen Harbeck, the head of the SIPC, told Barron's that it would only protect money held for 'purchasing securities' and said he had never been contacted by Robinhood before the product's launch. By the end of that week, Robinhood changed the branding to make it clearer that they were cash management accounts, posting a letter from its founders acknowledging that the 'announcement may have caused some confusion.'"
Barron's adds, "Seven U.S. senators wrote to the Securities and Exchange Commission, saying they were concerned that the Robinhood rebranding 'may simply be a way to circumvent regulatory scrutiny without offering full transparency to its customers.' ... Dan Egan, the director of behavioral finance at robo-advisory firm Betterment, says that the Robinhood episode hurts the industry."
Betterment also may be headed for scrutiny, as it too seems to substitute a higher-risk bond fund option for "cash" or "cash management." It's Smart Saver product appears to be a portfolio of ultra-short bond fund ETFs masquerading as a money market account. Their site says, "Betterment's Smart Saver account offers income through a managed portfolio of ultra-low-risk bonds. As of Dec. 3, 2018, the expected yield for Smart Saver is 2.09%. Other options, discussed below, typically have lower yields." (Note: The average money market fund currently yields 2.20%, as measured by our Crane 100 Money Fund Index.)
Their offering appears to turn a higher-yielding and higher-risk bond fund yield into a money market yield, offering more risk and lower yield due to added fees. The disclosure tells us, "References to a 2.09% yield for a Smart Saver account correspond to the asset-weighted blend of the 30-Day SEC Yield as of Dec. 3, 2018 of the ETFs that comprise this portfolio net of Betterment's 0.25% management fee for its Digital Plan. Clients who are in Betterment's Premium Plan pay an advisory fee of 0.40%, reducing the net yield by an additional 0.15%."
In other news, MarketWatch writes, "This is how much money is sitting 'on the sidelines' waiting to come in to the market." They say, "It is as reliable as your alarm clock. Every time the stock market suffers a swoon, slump or downright rout, financial experts appear in the media to reassure investors that a charging knight is about to ride to their rescue. That knight? Billions or even trillions of dollars that are being held 'on the sidelines' in the form of cash, and are 'waiting to come into stocks.'"
The piece explains, "The basis of the argument: Investors -- including households, the rich, the nervous, and big institutions -- are holding big reserves in the form of cash, money market funds, short-term bonds and the like. When stock prices fall, they will be tempted to convert some of that money into stocks, 'putting it to work,' and that will start driving the market higher."
MarketWatch continues, "But is it correct? How much money are we really talking about? And how much effect will it have? The U.S. Federal Reserve reports that at the last count, everyone across the financial system, from grandmothers to hedge funds, was holding a total of $2.9 trillion in overnight money market funds (see Table L.206, line 1 on p. 115 of this report), $4.4 trillion in checking accounts and currency (Table L.204, line 1, p. 114), and another $12.1 trillion in savings account and Certificates of Deposit [Table L.205, line 1, p. 115)."
They tells us, "That comes to $19.4 trillion in gross 'cash' and equivalents that is 'on the sidelines' of the stock market. Meanwhile, says, the Fed, the total market value of all U.S. stocks at the same time came to $41.7 trillion (Table L.223, line 1. p. 130).... Alas not, say experts. For every stock that is bought, one is sold, financial analysts observe sadly. Every time someone invests, someone else cashes out, they lament."
Finally, the article adds, "Those pushing the argument about the money on the sidelines, say experts, are either being dishonest, or falling for one of the oldest tricks in the book -- the 'fallacy of composition.' It's comparable to the idea that everyone at the poker table can win. There may be trillions of dollars on the sidelines, but they cannot come into the market. The net figure for the amount of money that is going to come into the market is $0.00."
