Savers should see better returns

I’ve been told that as a general rule in the financial services industry, the average age of a financial services client will be about 15 years older than the advisor on duty. Over the course of my career, I’ve found this to be roughly true, although I seemed to start working with older clients early in my practice, which means that as an IT professional Gen X investment, I’ve enjoyed the adventure of serving Baby Boomers and Gen Xer customers for all my 28 (yuck) years on the job.

Some of the stories that I remember clearly from the start of my career in the early 90s, are my biggest generation customers and even some of the baby boomers talking nostalgically about the “15% CDs” they were getting from banks 10 years earlier. As those nostalgic memories and the stories that went with them have since faded, as interest rates have started to rise over the past year, a few stories about “CDs back then” have started circulating again. They still make me smile.

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For some reason, people sometimes think that investors like me have a general disdain for bank CDs and other conservative investments. That couldn’t be further from the truth. As a financial advisor and saver myself, I crave conservative rates of return. Having invested in the financial markets for decades, I’ve developed a deep respect for what it takes to endure the short-term stress necessary to achieve the highest potential long-term returns from the stock market, and that’s not all. is certainly not for everyone.

As computers based on hyper-trading algorithms have, in my opinion, dominated short-term market activity, I believe that some individual investors have become confused and even traumatized by the volatility of modern financial markets. I don’t envy individual investors having to endure, nor myself having to guide clients through market cycles. So give me a less stressful option that helps pursue financial goals over time, and I’m all for it.

Thus, it has been particularly frustrating to see the stingy and stubborn deposit rates offered by local banks even as interest rates in general have risen sharply over the past year. It didn’t take long for 30-year mortgage rates to break through the 7% barrier, yet a review of some of our well-known local banks and credit unions shows that three-year CD rates are still within the 2% range. Which give?

Higher rates can be found with online banks or through brokerage platforms like the one Oak Partners has access to. But online banking involves some challenges when opening new accounts, and the bank CDs available from investment firms are actively charged, so neither offers the ease of ownership of a local bank. That being said, rates on online deposit accounts and short-term CDs on brokerage platforms are currently around double the rates offered locally.

I have an unsubstantiated theory regarding how the Federal Reserve manages the banking reserve system in modern times that may explain some of the deposit rate avarice. Banks are required to maintain a certain level of reserves, or deposits, with the Fed. Prior to around 2011, the amount of reserves required by the Fed was much lower, and the Fed did not pay banks interest on the reserves needed to remain on deposit.

Following the 2008 financial crisis, however, in order to make the banking system more sustainable, the Fed adopted a policy of “abundant reserves”, which required banks to keep more money on deposit, but at that time the The Fed has also started paying interest on required deposits as part of its general interest rate policy. My theory is that the low rates offered to bank savers may be an unintended consequence of this new abundant reserves policy, as banks receive interest on their reserves they simply no longer feel compelled to offer higher rates for win new customers. deposits. Again, however, this is just my theory, and I can’t find anything in my research that validates it.

Anyway, I am encouraged even though the rapid rise in interest rates that we are experiencing has created stress in the financial markets, one of the positive effects should be that savers are finally able to receive a some return on their more conservative deposits, and it’s time, because the drought in bank deposit rates has gone on far too long.

CDs are FDIC insured within specific limits and offer a fixed rate of return if held to maturity, while investing in securities is subject to market risk, including loss of principal . Traded CDs sold prior to maturity in the secondary market may result in a loss of principal due to interest rate fluctuations or lack of liquidity. Traded CDs are registered with the Depository Trust Corp. (“DTCs”). Traded CDs with discount and/or call-in provisions may be less favorable than traditional CDs without these features. Note: Please keep the blank line between these two separate risk-based information.

The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual. Past performance is not indicative of future results.

Marc Ruiz is a Wealth Advisor and Partner at Oak Partners and a Registered Representative at LPL Financial. Contact Mark at [email protected]. Securities offered by LPL Financial, member FINRA/SIPC.