Cash - Another Hidden Brokerage Fee

Last Updated Aug 3, 2010 11:25 PM EDT

Lately, as I review new clients' brokerage statements, I'm beginning to notice large sums of cash in their accounts, even into the millions. What are these investors earning on their cash? In some cases, it's 0.00 percent APY.

Cash is King, just not for the investor
There has never been a more expensive time to hold cash. That may be precisely why brokerage firms want you in cash. They don't have to pay you much, and sometimes they don't have to pay you anything at all. But your loss is their gain, as the cash they take from you is put to work for them in a variety of ways.

This amounts to yet another hidden fee in your account. It's really no different than the hidden fees that you are probably paying in your mutual funds via trading costs and other soft costs not reported by the mutual fund company.

Wall Street is counting on the power of inertia. They're hoping that you will do nothing with that cash but let it sit where it is, allowing them to line their pockets in the process.

Calculate your costs from cash
I calculate the client's costs of cash earning nothing versus cash earning 1.5 percent a year. I chose the 1.5 percent number because that's the highest safe return I know of, short of teaser rates and other contingent rates, where you have to make minimum number of transactions. Thus, $100,000 in cash equates to $1,500 in lost opportunity.

Where to stash your cash
I keep most of my cash at Alliant Credit Union earning that 1.50 percent APY. Anyone can join, though you may have to pay a one-time $25.00 fee to join the National Parent Teacher Association in order to qualify for membership. It's insured by the Federal Government, via the NCUA, for up to $250,000 for an individual and $500,000 for a joint account.

To get the client to overcome inertia and open the account, I often frame the question as follows for a client wanting $100,000 in liquid risk-free cash. I ask, "If I offered to pay you $1,500 for an hour of your time, would you take it?" The answer is nearly always yes, so I note it will take about an hour to open this account and move their cash.

My Advice
By paying us nothing for cash, Wall Street has found yet another way of extracting fees without us noticing it. Don't let them. It's important to hold cash, but it's also important to make sure it's working for you.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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