Banking_relationships
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about the
00:00:04.680 | ideal number of banking relationships to feel safe and secure, but also to get the best
00:00:10.160 | terms.
00:00:11.160 | The collapse of Silicon Valley Bank and Signature Bank, as well as the almost collapse of First
00:00:18.800 | Republic Bank, they're getting a $30 billion deposit injection by some large institutions
00:00:23.920 | right now, and also the almost collapse of Credit Suisse Bank, a firm which I used to
00:00:30.000 | work for.
00:00:31.400 | It's prudent, it's wise for all of us to review our existing banking relationships and see
00:00:37.000 | if we are well positioned to weather another potential bank run.
00:00:41.120 | This situation with the banks can go on and on and on because I would say a majority of
00:00:47.120 | the banks have some losses, some mark to market losses in their bond portfolio because rates
00:00:53.640 | went up.
00:00:54.640 | If they hold to maturity, they're going to be fine.
00:00:57.320 | However, in the meantime, they're going to be loss making because their deposit costs
00:01:01.880 | have gone so far up.
00:01:04.600 | So if banks are forced to sell because depositors are pulling assets, they're going to have
00:01:10.760 | a problem.
00:01:12.040 | So in my opinion, the ideal number of banking relationships to have is three.
00:01:17.160 | One for operations, two for borrowing, three for investing.
00:01:23.720 | Now obviously when you first start out, one bank is probably good enough.
00:01:28.280 | You're going to receive your direct deposits to that bank, you're going to write checks,
00:01:33.600 | all that good stuff.
00:01:35.120 | But as you grow wealthier and your finances get more complicated, you want to continuously
00:01:40.940 | shop around for the best terms out there.
00:01:44.620 | So that main bank that you're banking with might not have the best borrowing rates if
00:01:49.420 | you want to get a personal loan or a mortgage.
00:01:53.140 | And that bank might not offer the best investing platform or the lowest fees or no fees.
00:01:59.920 | So you should shop around as well.
00:02:02.720 | It's the same idea as shopping around for an insurance quote, whether it's homeowners
00:02:07.780 | insurance or life insurance.
00:02:10.120 | About every two years you should probably shop around because you'll be surprised at
00:02:14.580 | how much you can save by just looking at other vendors.
00:02:19.360 | For example, my wife thought she had the best life insurance term policy with USAA for six
00:02:25.300 | years until she started shopping around.
00:02:28.140 | Why?
00:02:29.140 | Because I decided to shop around because my 10-year term life insurance policy was coming
00:02:34.280 | to an end and I needed something new.
00:02:36.820 | And once I started shopping around, I said, "Hey, check out what Policy Genius can offer
00:02:41.220 | you."
00:02:42.220 | And so she checked around and she was able to get a better life insurance policy for
00:02:46.780 | 20-30% cheaper.
00:02:48.340 | And she renewed another 20-year term lease and that was pretty good.
00:02:51.540 | So shop around.
00:02:52.540 | At any given moment in time, financial institutions are looking to drum up business for their
00:02:58.400 | mortgage business or to gain more deposits.
00:03:02.300 | It's very fluid because money comes and goes all the time and banks, to stay competitive
00:03:08.420 | or to try to attract new capital, have to offer higher rates or lower fees or better
00:03:15.580 | terms.
00:03:17.020 | And if you're just starting out on your financial independence journey or you don't have that
00:03:21.660 | much money, you're not going to get the best rates.
00:03:25.140 | You're not going to get the best CD rates, money market rates.
00:03:28.180 | You're not going to get the lowest mortgage rates.
00:03:30.820 | So you need to shop around.
00:03:33.100 | And at the same time, it's not practical to have 7, 8, 10 banking relationships unless
00:03:39.300 | you are a centimillionaire or billionaire because it's hard to keep track of everything
00:03:44.120 | and you've got to file all these tax forms.
00:03:46.960 | The reality is, if you bank with one FDI insured bank, you're probably going to be fine if
00:03:54.060 | you have under $250,000 in assets.
00:03:58.200 | Now the FDIC insurance is $250,000 per ownership account.
00:04:02.940 | So if you have a partner, there's a joint account, you got $500,000 in FDIC insurance
00:04:10.340 | for your cash or CD.
00:04:13.060 | So if you have three banking relationships, then you have at least $750,000 in FDIC insurance.
00:04:21.100 | Do you really need that much?
00:04:23.180 | Probably not.
00:04:24.180 | For most Americans, individuals or households, we don't have $750,000 in money market savings
00:04:30.580 | or CDs.
00:04:31.580 | I would say less than 5%, maybe less than 2% of Americans have that much sitting around.
00:04:37.460 | In addition to FDIC insurance, $250,000 per ownership, there's the SIPC, which protects
00:04:44.720 | against the loss of cash and securities such as stocks and bonds held by a customer at
00:04:49.360 | a financially troubled SIPC member brokerage firm.
00:04:53.860 | And basically all the big brokerage firms, Fidelity, Vanguard, Charles Schwab, they are
00:04:58.980 | all SIPC member brokerage firms.
00:05:02.900 | So you don't have to worry too much.
00:05:05.380 | Well, you do have to worry if you have millions and millions and billions of dollars in securities.
00:05:11.820 | You know, like let's say what happened with Bernie Madoff and you had $10 million with
00:05:15.460 | him.
00:05:16.460 | You might not see that money back if there is fraud.
00:05:19.980 | But it's proven that most people get most if not all of their money back due to fraud.
00:05:26.580 | Now finally, there's also this thing called a sweep program.
00:05:30.100 | Now the sweep program is to help customers.
00:05:33.220 | It's a brokerage or a bank account that at the close of each business day automatically
00:05:37.820 | transfers funds that surpass or fall short of a certain threshold into a higher interest
00:05:43.700 | earning investment option.
00:05:45.660 | And that's usually a money market fund.
00:05:47.820 | Maybe it's not automatic for some, but for most brokerage accounts and banks, it is automatic.
00:05:53.140 | And there's also the sweep program participants where the number of financial institution
00:05:58.740 | participants helps you gain more FDIC insurance on your cash.
00:06:04.100 | So when you look online and you see some brokerages say, well, we have $1 million in FDIC guarantee
00:06:12.020 | for you, it's because they have four banking institutions that are part of their sweep
00:06:17.820 | program that are offering FDIC insurance.
00:06:21.300 | Little complicated, but not really.
00:06:22.780 | It's a evolution of the financial institutional system to protect its customers better.
00:06:28.660 | Now back to the ideal number of banking relationships.
00:06:32.060 | I say three, I actually have four because I have a relationship with another bank for
00:06:37.200 | my business because I want to keep my business and personal separate.
00:06:41.340 | And the reality is keeping track of all these accounts is a little cumbersome.
00:06:46.820 | Four for me is the max.
00:06:48.300 | I don't know about you.
00:06:49.500 | I did a poll in my post and it looks like about 35% of y'all have four or five banking
00:06:56.980 | institutions.
00:06:57.980 | 23% have three, 14% have six to eight, 12% have two, only 5% of y'all have one, 2% of
00:07:07.260 | you have 10 plus and 1% of you have nine to 10.
00:07:11.040 | So 42% of you have four to five.
00:07:13.440 | That sounds about right.
00:07:15.800 | So which three would you choose?
00:07:18.220 | Well, it's based on the terms really.
00:07:21.100 | For me, it's terms first.
00:07:22.820 | Can you get me the highest savings rate, the highest CD rate, or the lowest mortgage rate?
00:07:28.420 | If so, I'm probably going to bank with you, especially if you have a good user interface
00:07:33.140 | and a nice person to talk to.
00:07:35.080 | But let's look at the top banks by total assets.
00:07:39.420 | At number one is JP Morgan Chase with about 3.2 trillion.
00:07:44.440 | Number two is Bank of America with 2.41 trillion.
00:07:47.740 | Number three is Citigroup with 1.77 trillion.
00:07:51.580 | And number four is Wells Fargo with about 1.72 trillion as of 2023.
00:07:57.940 | These are the top four banks.
00:07:59.700 | They are designated as the quote too big to fail banks.
00:08:03.140 | They cannot fail because if one of them fails, there's going to be contagion and systemic
00:08:07.500 | risk across the entire economy and it'll be really bad for us.
00:08:12.340 | So the government basically has implicitly decided to make sure none of these banks fail.
00:08:18.740 | Now, if you look at banks five to 10, their total assets drop off tremendously.
00:08:24.380 | At number five is US Bancorp at only 585 billion.
00:08:28.780 | PNC Financial Services, 552 billion.
00:08:32.780 | Chuist Bank, 546 billion.
00:08:35.460 | Goldman Sachs at 486 billion.
00:08:38.580 | Number nine, Capital One at 453 billion.
00:08:41.720 | And number 10, TD Group US Holdings, 386 billion.
00:08:46.580 | I doubt these banks will fail either.
00:08:49.580 | But if you're going to go with a bigger bank, you might as well at least have one or two
00:08:54.420 | of your three banks as one of the biggest banks if you want to sleep well at night.
00:08:59.460 | Well, what about a regional bank like First Republic Bank and Silicon Valley Bank?
00:09:04.900 | Well, clearly, these banks are being targeted for withdrawals, which is why their share
00:09:11.060 | prices are getting crushed.
00:09:13.420 | But if you have less than $250,000 with each bank, or if you have a huge loan with these
00:09:20.500 | banks, you shouldn't really be worried.
00:09:22.900 | A lot of people go with regional banks due to the relationships.
00:09:28.100 | You have people who you can call or who will text you back or respond to you over email
00:09:33.380 | within 30 minutes, an hour.
00:09:35.420 | You know, this type of service is really valuable to some people, especially to higher net worth
00:09:40.460 | individuals.
00:09:41.740 | However, if you have mega millions, well, you probably need to diversify away from regional
00:09:48.540 | banks.
00:09:49.540 | You can have your account there, but I wouldn't make it the main banking account.
00:09:54.540 | I would certainly try to balance out how many assets you have with each of your banking
00:09:59.420 | relationships.
00:10:00.820 | Don't have one bank with 80, 90% of the assets and the other two banks with 10%, 10%.
00:10:07.340 | I would think, I think it's smart to go, you know, 33%, 33%, 33%.
00:10:12.460 | Obviously, you're never going to get it exactly right.
00:10:15.020 | But to spread that risk around.
00:10:17.660 | Another strategy worth deploying is to borrow more heavily from a regional bank, a smaller
00:10:23.620 | bank that might be more at risk, but who is giving you much better terms, much lower mortgage
00:10:29.020 | rates, borrowing rates, and then invest with the larger banks and have more of your capital,
00:10:34.780 | your cash with the largest too big to fail banks.
00:10:39.260 | Every single banker wants as many accounts open with you as possible.
00:10:44.540 | The more accounts they have, the better they get paid, the more they can make money.
00:10:48.900 | As you develop more wealth, accumulate more wealth with one bank, your terms will get
00:10:54.860 | better.
00:10:56.020 | Their customer service is going to get better.
00:10:57.540 | They're going to be more responsive to your needs.
00:11:00.060 | And that's a great thing.
00:11:01.540 | However, you have to be aware of the insurance levels and the solvency of the bank.
00:11:06.880 | If you stick with the top banks, you're probably never going to encounter a problem.
00:11:11.340 | So one strategy you should think about as you get wealthier is to concentrate your assets
00:11:17.320 | in one finance institution so you can get the best service.
00:11:21.460 | You have to understand what that tier service entails.
00:11:25.420 | So there might be three tiers at a bank where if you have 250,000, you're at tier three,
00:11:31.380 | 500,000 to 1 million, you're at tier two, and then at 1 million or greater in assets
00:11:38.300 | or in borrowing, you're at tier one and you get the best terms.
00:11:43.460 | So if three banks is the ideal number of banking relationships to have, and 1 million is generally
00:11:50.620 | the threshold to get the best terms, tier one terms, then your goal should be to have
00:11:55.660 | about 3 million or more spread across three banks equally.
00:11:59.980 | Actually, it doesn't have to be 3 million in assets.
00:12:03.640 | It could be a $1 million plus mortgage at a regional bank or smaller bank that has the
00:12:09.580 | best terms for borrowing costs, and then you can spread out 1 million to a large bank and
00:12:16.580 | another million to another large bank with good user interface, no trading commissions,
00:12:21.740 | and a great plethora of research and available securities to purchase.
00:12:26.540 | Now let's say you are very wealthy, very fortunate, and you have over 10 million investable assets,
00:12:32.420 | 50 million, 100 million, a billion.
00:12:35.660 | What is the right strategy?
00:12:36.940 | Well, you can still stick with three banks or maybe four banks, but instead of just holding
00:12:42.700 | your money in cash, you should buy US Treasury bonds.
00:12:47.900 | US Treasury bonds or bills are very liquid, and they yield greater amounts than your money
00:12:54.660 | market funds.
00:12:55.880 | So you can buy an unlimited amount of US Treasury bonds, and therefore the US Treasury Department
00:13:02.400 | is your banker.
00:13:03.720 | And the US Treasury Department isn't going to go bankrupt because it is the system.
00:13:07.780 | It is the guarantor of last resorts.
00:13:10.860 | It is the one who can print unlimited amount of funds.
00:13:14.620 | So that's what you should do.
00:13:16.780 | Oh, and it's funny.
00:13:18.560 | After I had finished playing tennis, a billionaire was up next.
00:13:23.060 | I've known him for over a decade, and he's probably worth $2.5 to $3 billion.
00:13:28.920 | Very successful investor.
00:13:30.620 | You might have seen him run for president one day.
00:13:33.460 | Anyway, so I asked him, "What do you do with your cash in light of the situation?"
00:13:38.820 | And he said, "Well, it's obvious.
00:13:40.140 | I own assets.
00:13:41.780 | My assets that can't be taken away.
00:13:44.540 | And also, I own a lot of Treasury bonds."
00:13:47.460 | So there you have it.
00:13:48.460 | Someone who has way more than 99.9999% of us owns assets, real assets, and buys Treasury
00:13:56.620 | bonds.
00:13:57.620 | Now, let's just go back to the majority of people who don't have that type of money.
00:14:02.740 | And let's say you just have $50,000 to $100,000.
00:14:04.860 | Should you still have three banking relationships?
00:14:07.020 | Well, you should obviously still have one.
00:14:09.420 | You should have a minimum of two, I think, for optimization purposes.
00:14:13.740 | If you want to get a loan, if you want to get the higher rates.
00:14:17.060 | Two, because when you have two, you have competing bankers or banks who want your assets.
00:14:23.560 | So when you have competition, well, people are going to offer you better terms.
00:14:28.080 | So if your assets are well under $250,000, I say have at least two banking relationships.
00:14:34.480 | You never know when one bank might stop giving you that line of credit or cut off that personal
00:14:40.180 | loan.
00:14:41.180 | And it's nice to have more access to more branches and more ATMs as well.
00:14:44.460 | All right, folks, let's all hang in there.
00:14:47.100 | It seems like all the governments around the world, all the regulators are on the same
00:14:51.900 | page and they don't want any bank to fail.
00:14:55.940 | The silver lining from all these bank runs is that the Federal Reserve might be a little
00:15:00.940 | softer when it comes time to hike again or a little quicker when it comes time to pause
00:15:06.880 | or to cut.
00:15:08.100 | Although the ECB did raise rates surprisingly on the morning of March 16th by 50 basis points
00:15:14.620 | saying inflation is still too high.
00:15:16.700 | We got to get that under control.
00:15:18.760 | So I expect the Federal Reserve to hike one more time, another 25 basis points, get to
00:15:24.660 | 5% on the Fed funds rate, and that's it.
00:15:28.080 | The more important point is going to be the language that Jerome Powell tells the world.
00:15:34.140 | He needs to sound confident, calm and aware.
00:15:37.540 | If he can do those three things, I think the market is going to like that, which also means
00:15:43.060 | I don't think we're going to get back to the recent lows of $3,597 on the S&P 500.
00:15:50.000 | If we get below $3,800, I'm going to be buying again.
00:15:54.860 | Probably going to be nibbling again.
00:15:56.140 | I'm still filling out my kids 529 plans respectively.
00:16:00.640 | I'm about 60% of the way there for this year for each.
00:16:05.400 | So just bit by bit, dollar cost averaging a little by little.
00:16:09.820 | I'm still happy with my treasury bonds yielding 5% as we wait for the storm to end.
00:16:15.440 | And there is a scenario by mid this year, mid 2023, we could feel a lot of reprieve
00:16:22.020 | because we know the Fed hike cycle, the rate hike cycle has ended.
00:16:27.580 | And there's only upside in terms of downside with the Fed funds rate.
00:16:32.040 | And given the stock market looks six to 12 months ahead, we do have hope.
00:16:38.220 | So I would say keep the hope alive.
00:16:41.100 | And if you're looking to buy real estate over the next three to six months, I think is a
00:16:45.660 | really opportune time.
00:16:47.620 | The focus really is going to return to real assets that hold their value better, that
00:16:52.780 | are less volatile, that produce income and that provide utility.
00:16:56.660 | Thanks so much, everyone.
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