Lazy Man and Money

Are Banks and Brokerages Winning Your Business for Pennies?

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Yesterday a friend of mine sent me a message about something that I’ve been meaning to write about for some time. The gist of the message was that there are minimal differences in expense ratios when they move a hundredth of a percentage. He’s right.

There are a few brokerages that seem to be in an “expense ratio war” for many popular ETFs (exchange traded funds). Vanguard had the lowest fees for many years. However, Schwab and Fidelity have lowered their fees a lot and can be just as competitive as Vanguard.

The average investor shouldn’t care if their expense ratio is 0.04% or 0.06%. If you do the math, on a million dollar portfolio in the future, the difference is likely to be under a thousand dollars. While that may sound like a lot, but by then that likely won’t even pay your cable bill. (I joke… kind of.)

Even if you go from 0.06% to 0.15% it isn’t a huge difference.

So why care about expense ratios at all? It really starts to matter when you give up 1% of compounding interest year after year. Even a half percent can be a big deal. When you stop and think about it, it makes sense right? Paying 1% of a $200,000 house is $2000. Paying 0.04% is paying $80. Paying 0.06% is paying $120. So going from $80 to $120 is costing you $40, not a big deal. You want to avoid going to $2000 though. That’s a big expense to pay every year.

I love low fees as much as the next guy, but there is the law of diminishing returns. It’s like trying to squeeze water from a stone.

Banks and Interest Rates

For years, I’ve seen a bank advertise that they were paying as much as 10x as much interest than the national average. (I can’t remember which bank it was, which tells you how effective this kind of advertising is on me.) The bank had a small graph that showed the national average bank paid 0.05% in interest. Then they showed they were paying 0.5% interest on their high-yield account.

Those might not have been the exact numbers, but it was close. Essentially if you had $10,000 in the bank account, you’d earn $50 of interest a year instead of $5. Don’t get me wrong, I’ll take $45 for free. However, I won’t spend my time switching banks. I typically keep around $5000 in a bank anyway, so the interest difference is closer to $25 a year.

You have to give the bank a lot of money before the “10x” more interest amounts to much more than one free dinner out each year.

The other detail that isn’t mentioned in the ad is that many banks have similar high-yield interest accounts. There might not even be the need to switch banks at all.

Bottom Line

It’s great to be able to shop around for the best rates and lowest investment expenses. However, I don’t think people should waste their time trying to chase zero expenses or an interest rate that isn’t going to generate great returns.

P.S. I tried to do something a little different with this than usual with this article today. I started with free-form typing as fast as I could think and then cleaned it up a bit at the end. Ideally, I’d have polished this article for a few days with charts and links to real data. However, one thing that I’ve really liked about blogging is that it is more informal. I try to get 90% of the idea out there in 10% of the time.

Lower the Interest Rate on Your Mortgage Without Refinancing?

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On my trip to Boston a couple of weeks ago, I met up with a couple of my best friends from college. One is probably more into personal finance than me – but he’s just not the blogging type. He can dazzle with Excel and Quicken and probably could tell you exactly how much money he has to the penny with a single click. The other friend is a lawyer specializing in real estate. When I closed on my condo purchase, he was the guy I went to and it was smooth sailing.

Somehow, we got onto topics of the economy. We gabbed about the sub-prime crisis. They thought that the mortgage holders were to blame because it’s their responsibility to know what they can afford and not get sucked in a mortgage lender/salesman. I took a different view and thought it was the mortgage lender, because they are expert trying to explain a topic that most people are unfamiliar with (mortgages) and pushing them into more complex vehicles with escalating interest rates. The answer is that it’s probably a combination of the the two. It’s almost like a homerun in baseball, sometimes the hitter does a tremendous job of hitting a good pitch and sometimes the pitcher does a lousy job of pitching the ball making the hitter’s job easy… and there’s a lot of homeruns that fall in between those extremes.

We also got on the topic of mortgage rates. They are historically extremely low right now. I lamented that I couldn’t take advantage of the low rates. I had lost a lot of the equity on my home and if I tried to refinance I wouldn’t have the 20% down that mortgage lenders like to see – especially in this market. I am also self-employed (with a less than impressive income) which probably doesn’t make them light up with joy. Lastly, since I moved to California and now rent the Boston condo, it’s not owner-occupied – yet another thing that banks would like to see. That’s three pretty decent strikes against me if I’m looking to lower my rate from 5.875% to some of the 4.875% rates available today.

My lawyer/real estate guru friend told me the solution was simple. He asked me if I came up as self-employed or unemployed on credit reports (I admit that I don’t know this). He said that if I showed up as unemployed, it would be very easy to get a lower rate. I could simply call up the lender and tell them that the ecomony is bad and ask if they could lower the rate – no refinance or paperwork necessary. The theory is that lenders would rather give you a lower rate than risk not getting paid and having to deal yet another foreclosure.

What do you think? I think it sounds plausible and my source is rock solid. Still something sounds almost a little too good be true. Is this possible? Has anyone out there been in a similar situation and tried it?

Finovate Demos – Part 4

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In case you missed parts one, two, and three, I’m sharing my notes after seeing 40 start-up financial companies present their companies. Today, I’m rounding up the last of the four companies.

BlingNation – You’d think this name would have something to do about pushing luxury branding, but that’s not the case. It’s yet another mobile payment. It looked like they weren’t a consumer product, but instead plan to sell their product for private branding.

Zopa – Won the Best of Show, which I think shocked many. This is not a P2P company in the US like the UK version (and they went out of their way to stress that). Zopa evaluates each country’s culture and regulations to determine the business opportunity present. The most interesting about this demo is that you can actually take a loan and pay back negative interest – if you have help from others buying a CD. Expect to read more of this from me in the next week or two.

TrustedID – I went to the restroom during this presentation, but for completeness talked to them after their demo. They prevent identity theft so they’d be in the same space as Lifelock. Looking over the benefits of their $100/year plan, I imagine one could approximate the value by getting free annual credit reports, free services like CreditKarma, and freezing your credit report when you don’t need it (free in some states, $15 in others).

BusinessLogic – MoneyPools – Incredible graphs, they just need Tom Cruise waving his hands to control them and you’d have Minority Report. Overall the product helps you view your asset allocation in extensive detail. Once your data is loaded in, you can do things like look at your retirement accounts in aggregate and then “zoom in” on sector and style analysis.

Aradiom – Another that I’d have to put in the “best demos” category, but completely irrelevant for consumers. They create a platform that makes it easy for banks to build mobile banking applications. Sounds dry, but they built an application there in the five minute demo. You don’t need to be a programmer, so it reminded me a lot of Visual Basic. You add pre-defined high-level components like a login screen and you are up and running.

CheckingFinder – This was a standout of the show and when they launch in a month, I’ll likely be in great support of them. In short, it’s a search engine for high-interest yielding checking accounts. They showed some banks that were willing to pay you 5% or more on your checking account if you meet a few requirements (such as make 12 debit transactions a month). I don’t know about you, but that’s getting into Scarlett Johansson attractive territory.

Sparkroom – I didn’t fully understand their product. It seemed to help people analyze how their lead generation campaign is performing. This is something that’s apparently useful for those in the mortgage business.

TradeKing – They seem a lot like Zecco except that you pay commissions. They focus on the community aspect as well and have been around longer. In the end, it’s about stock trading and telling others about it.

ClairMail – Another mobile banking company. At this point in the day, I was pretty much asleep. I didn’t really see anything exciting for consumers here.

Vestopia – Allows you to view the transactions of a real industry professional in real time. I think it’s an excellent contrast to the crowd-sourcing that other companies are doing with their community. To be honest, I didn’t have high expectations of this company, but the presentation was decent and I got to speak with the CEO for a few minutes which really galvanized the idea for me.

Finovate Demos – Part 3

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Here’s another round of my notes from yesterday’s Finovate demos. Since each company only got 5 minutes to show their stuff, my notes are short as well. I got to meet many of the companies afterward to get more detail.

Expensr – I thought this might steal Best of Show. It’s a personal finance management tool like Mint, but with a strong focus on widgets. The idea is that you can customize everything to your liking, which is one of the things that came up a month ago at a blogger meet-up they sponsored. They also have been acquired and will change their name to MoneyStrands. Shawn and Reman also put on a witty presentation ending with a humorous revelation that Mint must be scared of them because they bought an ad on Google for expensr.

SmartyPig – I’ve mentioned them in the past and hope to have a more complete review of their product in a week. They focus on three things as far as I can tell: making savings goals public so others can contribute, savings from their partnered retails, an interest bearing account earning a good rate.

Invesra – Retirement planning for financial institutions such as banks and credit unions. Not affiliated with a fund family which makes them unbiased. I believe they sell their product directly to the banks, so if your bank doesn’t buy it, you can’t use it.

Typhone – Mobile contactless payments with a great emphasis on security using industry jargon that I didn’t really understand. I don’t think I care about mobile payments much.

Wesabe – Wesabe had one of the most interesting demos in my opinion. So good that I went back after to see it again (and offer advice for how they can improve the product). They rolled out a new way to compare merchants and find better buying options. It’s much better than what they launched with originally. I could actually see myself using this, which may be the biggest praise I can give.

Wonga – This was one of the oddest entries of the show. It’s a UK-based company, with the URL of Samedaycash.co.uk. You can borrow money for the short term and pay them back at about a percent a day. Want to borrow money for 30 days, you’ll have to pay back 30% (though the interest rate wasn’t mentioned). Ramit and I turned to each other and said, “payday loan.” He made a good point that a credit card is a better deal if you have to pay it off within 30 days (as is the case here). You could pay no interest with the credit card.

Loanio – The much anticipated P2P lending company did show and demo the product. It looks like an unpolished Prosper.com. I have been waiting to hear what make them different than Prosper. It seems there are two things. You can have a co-borrower/co-signer on your loan and you can pay an additional fee to have a platinum listing (I’m not 100% sure what that got you).

Confident Technologies – Tries to the Internet of passwords. They partner with financial institutions to create a new way for customers to log into their accounts. Customers choose two categories like bikini babes and money. When you login, you type your username and up pops 16 pictures of various things like fish, hats, dogs, etc. Two of those 16 pictures will be a bikini babe and a picture of money. You select that pair and it knows it’s you. Bikini babe and money photo is different every time. Lots of scientific psychology studies back this up as a good thing for users. Not sure if bikini babes is one of the available categories – I would imagine it’s not.

IP Commerce – From my notes, “No idea what they do… energetic presenter.” I talked with a few people afterward and only one person had an idea of what they did, because it’s highly relevant to their day job.

SimpleTuition – Approximately from my home town in Massachusetts, they help students find loans and easily apply for them. It’s that “Simple” and useful.