Wealthfront introduces high-yield cash savings accounts

Robo sweeping cash to banks instead of investing in low-risk bonds

Feb 14, 2019 @ 2:00 pm

By Ryan W. Neal

Wealthfront is the latest digital investing startup to set its sights on customers' uninvested cash, showing the company's ambitions to automate more than just investment accounts.

The robo-adviser announced Wealthfront Cash Account on Thursday, saying they will operate like a traditional savings account and offer customers a 2.24% interest rate. Wealthfront customers can open an account with as little as $1.

Unlike similar cash management features at Betterment and Robinhood, the Wealthfront Cash Account is not a brokerage account invested in low-risk bonds. Wealthfront will sweep cash to one or more banks the robo-adviser has partnered with, said Wealthfront spokeswoman Kate Wauck.

"So unlike other services like Betterment's, for example, there is no market risk on our deposits and we don't charge any fees," Ms. Wauck said.

This also allows Wealthfront to offer Federal Deposit Insurance Corp. protections on balances up to $1 million.

Robinhood faced criticism in December for its Checking and Savings services for not making it clear enough to investors that its accounts are not protected by the FDIC and carry some market risk. Robinhood said the accounts would be insured by the Securities Investor Protection Corp., a claim disputed by SIPC CEO Stephen Harbeck.

(More: Are securities rules limiting the evolution of fintech?)

Betterment and Robinhood declined to comment on the new Wealthfront accounts.

Rising federal interest rates and increasing market volatility could be inspiring digital startups to find new ways to incorporate cash holdings into their service offerings. Moody's Investors Service recently reported that online brokerages like Charles Schwab Corp., TD Ameritrade Holding Corp. and ETrade Financial Corp. reported higher-than-usual cash in client brokerage accounts as investors sold their positions during market declines in December.

The companies swept the cash into bank accounts and realized increased revenue from interest rate hikes. Moody's assistant vice president analyst Fadi Massih called the firms' recent earnings a testament to how the online brokerage business model can benefit from market volatility.

Besides driving additional revenue from interest on cash, digital startups are rolling out cash management features to help increase their share of investors' wallets, said Bill Winterberg, founder and CEO of FPPad.

"Today, many savers open FDIC-insured savings accounts with online banks. This is inconvenient, though, as savers must also maintain an additional relationship with a brokerage firm and/or automated investment service if they wish to invest their cash into the stock market," Mr. Winterberg said. "If both services (high-yield cash savings and investing) are offered by one provider, the customer benefits from convenience."

(More:What millennials really want out of fintech)

When asked if this was driving the decision making at Wealthfront, Ms. Wauck said cash accounts have "been on our roadmap for a while now since it's an important step towards our ultimate vision of self-driving money," which is Wealthfront's plan to automate much more of a person's financial needs than investment accounts.

Robo-advice and digital financial planning can automate for long-term financial issues, while a cash account can help with short-term needs, Ms. Wauck said.

"We give you advice with all of the accounts you hold with us, which is a huge competitive advantage," Ms. Wauck said. "Our clients are really eager to consolidate all of their money over to Wealthfront and have been asking for this for a long time."

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