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Comment by nodesocket | Hacker News Reader

I have a high interest savings account with Marcus by Goldman Sachs. They used to pay out 2.25% but lowered to 2.15% recently. There are a few big red flags about Wealthfront for me...

1.) They claim to offer FDIC-insured up to $1 million, yet on the official FDIC website, and as far as I understand they only insure up to $250,000 per account. How is $1M possible?

2.) With the 10 year and 2 year US treasury yields plumitting well below 2% today, I don't understand how wealthfront can continue to offer 2.57% without taking a loss.

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The way they and their competitor, betterment, work is that they distribute your funds to a real bank or up to 4 of them for that 1m FDIC insurance.

The real risk I see using them is the money transition period from your current bank to their partner banks while moving the funds. It's why I opted for a traditional bank with high yield savings but not as high as theirs.

I'd be interested to know how they explain FDIC insurance during the transitional period. I could be wrong and they have that covered, too.

It's not FDIC covered during the transitional period, and they don't say how long the transitional period is either.

What is the transitional period? Is it that when you make a deposit, you're actually transferring to Wealthfront, which distributes it to the real bank accounts they keep your money in?

Yes, that's my understanding. But there's no guarantee that Wealthfront transfers to the FDIC-insured bank accounts as soon as possible. For all we know, Wealthfront could hold on to it for weeks.

1. Here’s a helpful FAQ from Wealthfront that might explain it: https://support.wealthfront.com/hc/en-us/articles/3600224058...

Tl;dr: they distribute your money to multiple FDIC-insured banks.

2. The federal funds rate and LIBOR both remain at 2.25%, give or take daily fluctuations. Furthermore, if you look a little further at Wealthfront, you might notice that they are offering margin loans at 4.75% - 6%, secured by a diversified investment portfolio at 3:1, so it’s entirely conceivable that they could be loaning the same money out again at a profit.

Wealthfront is not going to be loaning out money from their sweeps product to margin borrowing. Instead they will have a larger partner bank which offers then margin loans, they then mark up the interest rate and pass it on.

They do not have the accreditation to be issuing loans based on deposites. Thus why their banking product is a sweeps account.

I fully realize that. However, it's entirely possible that they are using the same banking partners to issue the margin loans and handle their deposit accounts. Even if they are not, the larger point is that there's a nice spread between what they are paying on the savings account and what they are making in margin interest -- and the margin account is extremely well-collateralized with liquid assets deposited in the borrower's Wealthfront account. The GP poster intimated that WF had to be losing money on their savings rate, and I'm just pointing out that it's entirely sustainable.

They can offer $1 million dollars in in insurance because it's an FDIC Sweep account - the funds may be stored at multiple banks behind the scenes. Fidelity, SoFi, and others offer FDIC sweeps as well.

They don't have any advisory fee on the cash account. That is only for brokerage accounts.

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