Good salespeople sell what the customer wants. And what does the money customer want today? Insured, high-interest bank accounts.
So, the salespeople at some of the major stockbrokerage houses are selling bank accounts. If you're a customer, you can buy a share in a certificate of deposit or one of those new money-market deposit accounts directly from your stockbroker, without setting foot in a bank or savings and loan.
If that sounds like a crazy mixed-up way to acquire a bank account, it is. But it's part of the trend to one-stop financial shopping, where a single institution will try to satisfy all your needs.
When you buy a certificate of deposit through a broker, you normally get a slightly higher rate than the bank is offering, for the same money. That's because brokers buy jumbo certificates of $100,000 or more and sell you shares in them for $1,000 each. These big certificates pay more interest than you can get from the bank's small, retail certificates.
But your investment is still covered by deposit insurance up to $100,000. You pay the broker no fees or commissions.
How does the broker make money? It comes from the bank or S&L. The banking institution pays the broker a commission for selling you its certificates of deposit and money-market deposit accounts. These commissions increase the bank's cost of funds. The bank recoups that cost by charging slightly higher interest rates on loans.
The more a bank has to pay to attract savings deposits, the more it has to charge for the money you borrow. High rates on loans are the flip side of high rates for savers.
Some stockbrokers are advising customers to remove their funds from the broker's own money-market mutual fund and switch to a bank's money-market deposit account. The bank account is federally insured and may pay higher daily interest rates than you're getting from the broker's money fund.
But the stockbroker also has a personal interest in getting you to make the switch. The bank or S&L will pay a commission for selling you their products. By contrast, the brokerage firm generally pays the broker no commission for selling you shares in its own money fund. So naturally, the broker finds the bank accounts more interesting.
A certificate of deposit is an insured deposit whose interest rate may be fixed for anywhere from six months to several years. Some certificates have floating rates. If you want your money back before the certificate matures, you can ask the bank or S&L to cash it in--in which case you will pay a penalty for early withdrawal. The minimum penalties are three months' interest on certificates maturing in a year or less, and six months' interest on certificates of more than a year.
If you buy through a brokerage house, however, you may have another option. The broker may buy your certificate before maturity, at its present market value. If interest rates have risen, a fixed-rate certificate will be worth less than its face value. In that case, compare the cost of paying the bank's interest penalty with the cost of selling through your brokerage house, to see where you will lose the least.
But if interest rates have fallen since you bought the certificate, you can sell through your broker for more than you paid. Clem Schaefer of Dean Witter Reynolds told my associate, Virginia Wilson, that at present, money investors are able to sell their fixed-rate certificates for something more than face value. (Floating-rate certificates usually sell for just about what you originally paid.)
The brokerage house will keep track of your bank certificates and mail you (or reinvest) the interest. You may receive interest payments monthly, quarterly or semi-annually, depending on the certificate.
A few mutual-fund groups will also switch their customers out of money-market mutual funds and into bank-operated money-market deposit accounts, if that's what the customer wants. The funds don't like to lose your business. But if you're going to move, they figure that they might as well earn a commission on the transaction. (Banks and S&Ls will pay the money fund for sending them your deposit.) Among the funds that offer this option: Calvert, Fidelity, Kemper and Vanguard.
But Kemper doesn't lose your business entirely. It switches you to a bank in which it has part ownership. The same is true at Dean Witter, which switches you to a related savings and loan association.