Robinhood, the online brokerage firm notorious for being the first to offer commission free trading, has just made another audacious move of offering to earn interest on uninvested cash in the brokerage account.
This comes after a failed attempt to offer a similar product in December 2018 consisting of checking and savings accounts that could offer 3% interest but the project was not backed by the Securities Investor Protection Corp from a regulatory stand point (the independent organization that regulates Robinhood) who announced they will insure the cash in these accounts. This time, Robinhood seems to have learned their lesson and is coming back with a more solid offer that could set a new standard for the brokerage business
What is Robinhood Cash Management?
Robinhood Cash Management is an additional feature to your Robinhood Brokerage account designed to have similar features as a regular checking account:
- The uninvested cash earns an interest.
- The uninvested cash is available for investment, withdrawal and spending through Robinhood debit card issued by Sutton bank.
- The debit card is free.
The major difference between this Cash Management feature and what Robinhood announced in December 2018 is that the uninvested cash will be moved to one of their participating banks accounts, also called program. This time, these accounts will be eligible to the FDIC insurance (total of $1.25 million and up to $250,000 per bank,).
How does it work?
1. Types of accounts
To be eligible for the feature, you have to first have a brokerage account with Robinhood. The Cash Management feature is not a standalone offer that gives you access to an interest earning account and a debit card.
If you decide to opt in the feature, Robinhood will create two accounts on your behalf ( separate from your brokerage account) with the program banks in which they will automatically sweep (or deposit) your uninvested money to earn interest under the “Deposit Sweep Program”.
These two accounts can be either two transaction accounts (TA) or one transaction account (TA) and one money market deposit account (MMDA). The Transaction accounts are either a NOW: Negotiable Order of Withdrawal Account or DDA: Demand Deposit Account.
After the cash is deposited in one of these accounts, it is immediately insured by the FDIC and start earning interest (2.05% as of October 8, 2019). While earning interest, the cash is also available for investments, spending with your debit card and withdrawals.
2. Participating banks
Robinhood has 6 banks participating in its program as of October 8, 2019:
- Goldman Sachs Bank USA
- HSBC Bank USA, N.A.
- Wells Fargo Bank, N.A.
- Citibank, N.A.
- Bank of Baroda
- U.S. Bank N.A.
Robinhood will choose the banks to which they will sweep your money in their pre-determined order, but you have the possibility to exclude a specific bank in case the total amount of your assets with a given bank has already exceeded the limit insured of $250 000 or could exceed it if combined with swept cash from your Robinhood brokerage account. It is unclear just yet if you will be required to disclose the total amount of your assets with a given bank to Robinhood support in order to submit your exclusion request.Yield
After the cash is swept in one of these accounts, the bank will pay an interest (not Robinhood), which currently is 2.05% annual percentage yield (APY) as of October 8, 2019.
The interest is accrued daily on every penny deposited based on your end of day balance at the program banks and is paid monthly.
Given the low interest rate environment we are currently in, this is an attractive interest rate.
4. The insurance
Being a brokerage firm, Robinhood (Robinhood Financial LLC) is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash).
With a regular brokerage account, your cash is covered by the SIPC protection. However, through the Cash Management feature, the swept cash benefits from the FDIC insurance that is offered by a banking institution, which insures up to up to a total maximum of $1.25 million (up to $250,000 per program bank. This insurance is inclusive of deposits you may already hold at the bank in the same ownership capacity).
Robinhood states clearly that you are ultimately responsible for monitoring the total amount of assets that you hold at each of these banks in order to determine the extent of deposit insurance coverage applicable to you with a given bank. For that reason, I imagine that Robinhood will report exactly which bank has your money but may not notify you when your account hits the limit.
You have to keep in mind that what is considered the same ownership capacity in a given bank is any existing account in your name, or a joint account ( the total amount not divided by 2) or an IRA (This list is not exhaustive and you should check your ownership capacity your bank).
I think this is an innovative product that has the potential to disrupt the industry and maybe set a new standard. It offers very attractive features yet through a fairly simple mechanism that combines the best of two worlds: the possibility to invest your money through your brokerage account and the possibility to earn interest under a banking protection.
Disclaimer: I am not an Investment advisor not a professional tax advisor. This blog post is for informational purposes only and is not intended to be an investment nor a tax advice. You should always consult with a investment advisor or a professional tax advisor for details about your investments and their tax implications.
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