Episode #271: Gary Zimmerman, Max My Interest, “Several Of The Banks On Our Platform Offer Preferential Rates That Are Only Visible On The Max Platform”
Guest: Gary Zimmerman is the Managing Partner of Six Trees Capital LLC and Founder of MaxMyInterest, a software platform that allocates individuals’ cash among their own bank accounts so that they earn the most interest possible while staying within the limits for FDIC government-deposit insurance.
Date Recorded: 10/21/2020 | Run-Time: 56:44
Summary: In today’s episode, we’re talking about how to actually earn some interest on your cash. Most banks today provide little to no interest and our guest has created a company that gives you a way to maximize your interest on deposits. Gary explains how trying to solve this problem for himself actually led our guest to start the company in 2013. We talk about how it works and why banks offer the Max platform a preferential rate, with the top rate on the platform right now at 85 basis-points, while most online banks are offering 25-60 basis-points.
As we start to wind down, we hear Gary’s thoughts on the potential for negative interest rates, how banks are positioned, and why the product has been picked up by lots of RIA’s and financial advisors.
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Links from the Episode:
- 0:40 – Sponsor: MainStreet – Mainstreet.us/Meb to save 25% on processing fees
- 1:38 – Intro
- 2:48 – Welcome to our guest, Gary Zimmerman
- 11:19 – Early days of running the business
- 13:49 – What is the use case for an individual saver
- 16:50 – Solution for investment accounts
- 20:28 – The individual experience using the platform
- 24:35 – Limits for individuals
- 25:38 – Where are interest rates today
- 28:25 – How often are funds being moved
- 30:58 – Fees for the platform
- 33:35 – Working with advisors
- 37:40 – Are they thinking about negative interest rates
- 40:16 – Helping businesses with their cash on hand
- 42:13 – Future for the platform and firm
- 43:52 – The brokerage that works for the consumer
- 44:58 – Flash Boys: A Wall Street Revolt (Lewis)
- 50:53 – Signing up – maxmyinterest.com/invitations/mebfaber for $20 welcome credit
- 51:33 – Naming the company
- 52:56 – His most memorable investment
Transcript of Episode 271:
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Meb: Hey, friends. Fun show. Our guest today is the founder of MaxMyInterest, a cash management solution for investors with significant cash balances who wish to optimize their returns on that cash. As a special offer for listeners to the show, you get 20 bucks off welcome credit by enrolling at maxmyinterest.com/invitations/mebfaber. Check out the link in the show notes. In today’s episode, we’re talking about how to actually earn some interest on your money. Most banks today provide little to no interest. And our guest has created a company that gives you a way to maximize your interest on deposits. We discuss how trying to solve this problem for himself actually led our guest to start the company in 2013. We talk about how it works and why banks offer the Max platform a preferential rate with the top rate on the platform right now at 85 basis points while most online banks are offering 0 to 25 to 60. As we start to wind down, we hear his thoughts on the potential for negative interest rates, how banks are positioned, and why the product has been picked up by lots of IRAs and financial advisors. Please enjoy this episode with MaxMyInterest’s, Gary Zimmerman. Gary, welcome to the show.
Gary: Thank you, Meb. It’s great to be here.
Meb: Where’s here? I hear you’re in Canada.
Gary: I am. I’m normally based in New York City but we had planned a trip to Japan over spring break and ended up having to reroute that because of COVID and ended up north of the border. And then within 48 hours of arriving here they closed the border and we’ve been here all summer. So it’s actually been a really pleasant place to spend the summer. But we’re excited to get back to New York as soon as we can.
Meb: I feel like it’s a little easier to social distance in Canada, mostly than Los Angeles. We usually do an annual trip to go skiing in Japan, which was also not happening last year. But I just realized the other day, I went to go grab my passport and it expired like four months ago. That can’t be right. And so I sent it back off, and I’m sure I’ll get it with a log jam they have in about two years. But anyway. All right. Let’s chat, all things cash. You have a company we’ve long been familiar with and friends with that has one of the better names out there. But take me to the origin story. Like many companies that succeed over time yours started in sort of the ashes of the last financial crisis. Am I right?
Gary: Yeah, that’s right, Meb. MaxMyInterest actually wasn’t started as a company. In fact, I had really no intention of starting a company at all. I was a banker at one of the big four banks during the financial crisis. And in March of 2009, the bank had a near-death experience, the stock fell to about 97 cents a share. And it was at that moment in time when everyone else at the bank was panicking about what’s going to happen with the bank? Am I going to lose my job? One of the things that I was focused on that fateful day was what’s going to happen to my cash that’s in this bank, because we were expats in Tokyo at the time actually, and had sold my apartment in New York and so I was sitting on all these sort of cash proceeds waiting to buy my next home. And I feared that every dollar that was above the FDIC limit would leave me as an unsecured creditor if the bank were to fail. And there are a lot of people in that position. And so I was simply looking for what’s the best way to keep my cash safe. I wasn’t even really focused on yield at that point, it was just how do I keep it safe? And how do I keep it liquid? And what was notable is that a lot of the broker-dealers used what are called broker deposit solutions, which are basically ways where a banker brokerage firm can take your excess cash and sell it to other banks and they collect their own scrape along the way. And the problem with those approaches to managing cash are that you hold cash because you want it to be safe and liquid. And the problem with these broker deposit systems is that they are neither necessarily safe nor liquid. And what I mean by that is that when the broker turns around and sells your deposits to other banks, they may end up selling them to other banks where you have other accounts and the FDIC sort of lumps it all together. So if I had $50,000, at bank A, and then the deposit broker sold $250,000 of my deposits to bank A, the FDIC would look at that and say, well, you have $300,000, that’s over the $250,000 FDIC limit. And so if that bank were to fail, you’re not getting $50,000 of your own money back. So that seemed like a risk I didn’t want to take.
There were actually two other issues. One was that if the custodian were to fail, I could lose access to all of my money until the resolution process was complete. And I also couldn’t get funds back same day. So I thought, there’s got to be a better way to do this. And the simplest thing I could think of was just to open accounts directly in my own name at multiple banks. Now, there’s nothing new about that people have opened accounts at multiple banks for a long time. But because I happened to be in Japan at the time, I couldn’t just walk around the corner and open up more American bank accounts, I had to go online. And when I went online, I found the nascent early beginnings of online banking. And I found ING Direct, and HSBC Direct, and Emigrant Direct. And I researched them and I said, “Well, wait a minute. These are just FDIC insured banks just like any other. And they don’t have a physical branch but that doesn’t matter to me, I’m 7,000 miles away anyway.” And so what I did is I spent the afternoon opening as many of these online savings accounts as I could, and I linked them all back to my existing brick and mortar checking account. So this way I could have, you know, the funds parceled out across multiple banks, I could make sure I was fully FDIC insured, I knew exactly where my money was. And if any bank were to fail, I would get my money back through the FDIC. But in the interim, I can still access my money directly at any of those other banks. So that was sort of how this started, it was my own sort of nerdy solution to keeping cash safe. But what I found, of course, is that the online banks are able to pay much higher rates than a brick and mortar bank because they don’t have the same physical branch infrastructure costs. It’s the same reason why if you go online, and buy a toy on Amazon, it costs less than if you were to buy it in a physical store, right. And that’s all really intuitive to us now, 11 years later, but at the time, it was still a fairly novel concept. So that was sort of the origin. Where it got really interesting is, as I found myself logging into these banks to check my balances and make sure that funds didn’t exceed the FDIC limit, I noticed that the online banks were changing their rates all the time. And it struck me that all of these accounts were basically a commodity. FDIC insured is FDIC insured and it doesn’t matter whether it’s Bank A, or bank B, bank, C. And so I began actively managing these accounts. And whenever I saw the bank to change their rates I would move money from one bank to another.
Well Meb, this went on for three and a half years. Every month login, check the balances, check the rates, move funds, wait for them to clear, move funds again. And at one point, I was back in New York, and I was sitting in my apartment going through this laborious process. And I thought, “Why am I wasting my Sunday afternoon doing this? I got to have something better to do with my time.” And I was about to stop and I looked back and I realized I picked up an extra 40k of incremental risk-free return.
And sort of a light bulb went off and I said, “Well, wait a minute. This is alpha. This is that elusive incremental return without incremental risk that everyone in finance is always searching for. And here it is in the most boring asset class in the world, which is cash. So I wonder if there’s a way that I could automate this so that I could continue to pick up this incremental earnings without having to spend my Sundays doing it.” And that sort of kicked off an exploration into trying to understand why is the banking system the way it is? What could be automated with technology? How do payments work? And I spent about nine months conducting sort of deep diligence in my spare time just trying to understand how all these pieces could fit together and could this be automated. And at the same time, I started digging into the demographics, right? How many people would actually need a solution like this? I know that some of my colleagues would benefit from it. How many other people might benefit? And what we found is that if you looked just at the top 1% of the U.S. population they were sitting on about a trillion and a half in cash equivalents. If you looked at the top 4% of the population, which is broadly defined high-net-worth, it’s any household with more than a million dollars in investable assets, there were about 6 to 8 million households in the country with those levels of assets. On average, they hold close to a quarter of their assets in cash, and so all totaled it was about $4 trillion. And I thought to myself, “Gee, here’s a multi-trillion dollar asset class that people are completely ignoring, and there’s an opportunity for real alpha generation.” And so I ultimately left my job as an investment banker and set off to see if we could turn this into a company.
Meb: Kudos to you, because…and maybe it’s that young naivety of being an entrepreneur where it’s one thing I feel like the, say, “Hey, look, I’m going to optimize my own accounts for the best rate,” and I feel like you’ll see people from like the Fire community, or Reddit like talking about that. It’s another to be like, “I’m going to build an entire company around this,” and have the belief that this massive project is doable. And that, to me is amazing to take on kind of the whole banking and Fintech world, but you’ve done it. Give me the early days. How did you go about automating, making this systematic, setting it up? You did this by yourself in your bedroom, or how did the early days happen? Give us some context. This was around what, 2013, 2014?
Gary: Yeah, it was 2013. So I spent about a year, prior to starting it, I spent about a year really trying to understand all the details I could. After about nine months of research had enough confidence that I said, “Look, I’m just thinking about this too much so I either have to stop thinking about it, or I have to go make it my day job,” because my day job was already 16 hours a day, so there weren’t a lot of hours left for anything else. So I left the bank where I was working and I locked myself in the New York Public Library. And I bought all of the payments manuals and just all of the geeky stuff that a bank would need to understand how funds flow. And I just sat there and I read and tried to absorb it and ask critical questions. Then I started reaching out to other people and trying to figure out, has anyone ever done this before? And if so, why didn’t it work? And if not, why didn’t they? Because I needed to satisfy those questions. I’m actually a fairly risk-averse person, which I suppose makes sense given the focus on cash as an asset class. But I really wanted to de-risk this as much as possible before I did something stupid, like go and leave my job to focus on it full time. So when we got started, I partnered with a friend of mine who ran a software consulting business and I shared with him confidence the idea. And he said, “I think we can build this, but I don’t think there’s a market for it.” And I said, “I think there’s a market for it but I don’t think you can build it.” And so we had this like natural tension to push each other to prove each other wrong. And to his credit they, through some very creative and real ingenuity, they came up with some solutions that were critical, and that now form the backbone behind three of our patents which took five years to get. But that’s how it started. It was really just me working with this consulting firm and we self-funded the project until we had a working alpha version. And that alpha version only worked with one bank. But the idea was we had one brick and mortar bank, and we could connect it to five online banks. And we could move funds around, and we had the whole optimization algorithm working. And at that point, I said, “Okay, technologically, I think this could work,” that’s the point at which we began to bring in outside investors to start to think about how we’d expand the platform and ultimately scale it.
Meb: To my knowledge, you guys have three main use case groups, and you can correct me, individuals, financial advisors, and then sort of business or treasury functions. Let’s start with the individual because I think a lot of people listening to this can identify with it. Because for example, I have a Bank of America account, and I’m a preferred rewards something or other customer. And they sent me an email not too long ago that basically was like, “Because you’re this super special customer, we’re going to increase your interest rate from 0.02% of 0.08%,” something along those lines. And then I said, “Wow that makes me feel really special.” But they’re being these sort of…for the individual these like two to three main considerations. You alluded to the first one early, which was safety. Is my cash insured? It’s like that old line in crisis investors are most concerned of the return of their money than the return on their money. So there’s the safety, is it safe. Second, is what’s the yield I can get on it, which I’d like to hear you talk about, particularly for individuals because that seems to be an absolutely critical part of this that I think most are ignoring? So walk us through, I’m an individual, I got some money, million bucks, whatever it may be. Let’s just do a million bucks in cash to be a good example, and what happens? How’s it work?
Gary: The whole premise behind Max was that we didn’t think that people wanted to switch banks, right? There are a million people out there saying, switch to my bank, no one’s going to switch banks, right? Your banking relationship is incredibly sticky. It’s sticky, because that’s where you’ve always banked, it’s sticky because you know where those ATMs are, you’ve got a local branch. Maybe you have direct deposit going into your account, and you auto-pay your utility bill, maybe you’ve also got a mortgage, car loan. There are any number of hooks that make a relationship with a bank super sticky.
Meb: And a big one, by the way, is just that sort of laziness and inertia. It works, people trust it, it’s a big name, it works. But the inertia is the big one in financial services. People hate to move.
Gary: Inertia is a huge one. We’ve actually thought of early on when we were raising capital, people said, “Who are your competitors?” I identified three competitors, awareness, inertia, and apathy. And someone was like, “Oh, is that apathy.com?” I said, “No, no, these are concepts, right?” So awareness, I don’t know I could be doing better. You get this email from your bank and they say that we’re giving you 0.08%, or eight basis points, eight one-hundredths of a percent, and you feel special. But what you don’t know is you could be earning 10 times that somewhere else. So that’s awareness. That’s a really big hurdle, and it’s made bigger by the fact that most broker-dealers don’t want you to know that higher rates are available on cash, because it turns out the core of their business model is earnings spread on your cash. And the same is true for most of the big brick and mortar banks.
Meb: Schwab get half the revenue from this. And so investors listening to this, it is vital that not just on your cash accounts, but your brokerage accounts, you understand the relationship between your money and who’s in charge of it. And so many brokerages are more than happy to default you into getting paid nothing or near nothing on your cash balances. There’s a lot of robo-advisors that we often say this where we say I don’t know how they call themselves fiduciaries, because they require a large cash allocation, and then don’t pay you on that cash allocation to the extent they could. And to me, that’s not a fiduciary. Anyway, but this is most brokerages if given the chance will not pay you on your cash.
Gary: I’m really glad you raised this Meb, because there are also two types of financial advisors out there and there’s a very big difference between them. So they’re the advisors who work with broker-dealers and most of the broker-dealers today are banks. And as you pointed out, the core of their business model is actually earning a spread on your cash. All the stocks and bonds are almost a red herring, the majority of the profit earned by broker-dealers is what they earn on your cash by paying you a sub-market return. And then there’s a different class of financial advisors called registered investment advisors, and they’re fiduciaries and by law, they have to look out for what’s in your best interest. And that’s where we’ve had a ton of success in delivering Max as a solution that IRAs can use with their clients, A, because it’s the right thing to do, and B, because it helps them illustrate why having an IRA is so much better than having a broker. The sort of simplest way to think about this, as you know is a broker is basically a salesperson, they get paid for selling product. And if you pick up a certain mutual fund, or if you open up a separate account, or if you buy this private equity fund, they’re getting some sort of upfront load and/or ongoing recurring commission on that sale. And so they’re incentivized for you to transact. A registered investment advisor gets paid usually a fixed fee or fixed percentage of assets, regardless of what you do. And so they’re not incentivized for you to trade. And they’re held to a different standard. It’s sort of this interesting bifurcation in the market between brokers who are held to suitability standard. So they’ll give you an initial upfront quiz about what’s your profession, and how much money do you make, and what’s your risk tolerance? Versus an IRA, whose job it is really to understand and engage much more in planning and really understand your risk tolerance and your objectives and try to find the best products for you. And so it’s a much more open architecture approach to wealth management, where they can seek out the best solutions as opposed to only being able to sell the product that’s on the shelf, which is typical for a broker. So that’s, I think, still a little-known distinction. I think most individual investors don’t really understand it. I certainly didn’t understand it before I started this project seven and a half years ago.
Meb: And I think the reason why is because most investors, like when going to see their doctor, start from the assumption of, you’re working in my best interest. That seems like a logical conclusion that this person should be a fiduciary. And that’s just not the case. And so Wall Street, if you haven’t learned this yet, listeners is designed to extract as much money as it can from you. So be very careful about where your interests are aligned or at odds. Okay, I derailed you, I’m sorry. Let’s go back to our you’re an individual, how do you open an account and how does it work? Give me the actual playbook of what the user experience is?
Gary: We’ll go back to your example, right? You’ve got an existing checking account, it’s paying you very little in interest and you’re smart, you know that you could be doing better. The way that Max works is, you start with your existing brick and mortar checking account and that doesn’t change. So direct deposit bill, pay, ATM, nothing changes. Our view is that you don’t need to switch banks rather; you need to supplement your bank. So you can keep your existing brick and mortar checking account, but what Max does is it helps you open a number of higher yield and online savings accounts. And the way that we do this is through our patented Max Common Application. For anyone who applied to college in last 20 years, or who has kids applying to college, you may be familiar with this concept. It used to be that when you applied for college, you had to fill out a separate application form for each school. And one school would ask you for your name and address and phone number and SATs, and another would ask you for that same information, but also an essay. Third school might want to know which sport you play. And so you had to fill out a separate application and repeat your information over and over and over again. And that limited how many schools you could apply to. And then along came the common application in the late ’90s. And the idea was really simple, which is, “Why should I have to fill out my name and address five times to apply to five schools? Let me just fill it out once.” So we took that same concept and we applied it to opening bank accounts, because banks, for the most part, need the same information in order to make an account opening decision and run it through all the KYC checks and that sort of thing. So you come to Max, you link your existing brick and mortar checking account. And then we provide you with this common application. And we show you all the banks that are available and their current rates, and you just check the box next to each bank where you’d like to open an account. You fill out a single form, we send that information to the bank securely. And within about 60 seconds, you get back a new account at each of the banks you’ve chosen.
Our newest bank that we added to the platform, just about a month ago, got an account opening down to 16 seconds. So this is really quick and really slick and really simple. And the neat thing about it is that you now have direct ownership over each of those banks that you’ve chosen. So you can call up the bank directly, you could go to the branch, you could add a CD, whatever you want to do, it’s your account. And even if you don’t use MaxMyInterest anymore, it’s still your account. You keep it, the funds stay in place. So the first thing that’s really important is that Max is not an intermediary, we never touch any money. We’re simply helping coordinate the flow of funds among your own bank accounts. So, great. I’ve linked my checking account, I’ve opened up these higher-yielding savings accounts. Now, what does Max do? You tell the Max software how much money you want to keep in your checking account. And everything above that will automatically flow to the savings accounts you’ve chosen. And what we do is every day we rank order those banks by interest rate highest to lowest. And the FDIC limit is $250,000 for an individual, it’s half a million for a joint account. But we’ll just stick to individual accounts for simplicity. So what Max will do is, in your example, let’s say that’s $750,000 of cash, and you told us, “Look, I want to keep $50,000 in my existing brick and mortar checking account.” So Max will take that other $700,000 it will put the first $250,000 in the highest yielding bank, the next $250,000 in the second-highest yielding bank, and the remaining $200,000 in the third-highest yielding bank. And that way you’re earning as much as possible subject to keeping everything fully FDIC insured. And then, here’s where the magic happens, we monitor interest rates for you every day seems like a fairly simple thing to do. But when we see the banks change their rates, we automatically tell your banks to send funds between one another so that they’re always sitting in the highest yielding bank accounts. And in doing so you can continuously earn the highest yield while always being fully FDIC insured without having to lift a finger. And all of this happens automatically for you every month, there’s nothing that you have to do.
Meb: So a lot of FAQs I imagine listeners are thinking about, the first being is there a practical ceiling on how much money an individual can have with you guys?
Gary: There’s technically no limit and there’s no lower limit or upper limit. We don’t impose any account minimums other than keeping $1 in each account just to keep them open. But all of the banks on our platform have agreed to no fees, no minimums, no rate tiers, nothing like that. It’s very straightforward. There’s also no maximum. From a practical perspective, if you want to be fully insured, a max caps out at about $8 million per couple or $2 million per individual. But we allow people to change the settings and exceed the FDIC limit if they want to. Our average customer is linked about $400,000 of cash to the system. But we have customers anywhere from 20k to 50k, all the way up to $7 million or $8 million as individuals. But typical customer is sort of six figures to low seven figures, that’s average.
Meb: What’s the lay of the land on interest rates today? So what is the ballpark rate range that people are seeing? I know, it’s come down over the past few years with the Fed. But where’s the ballpark?
Gary: Well, rates have come down significantly, and the Fed has cut rates into the zero to 25 basis point range, somewhere between zero and a quarter of a percent. Most online banks today, and we track them all daily, most online banks are paying somewhere between 25 and 60 basis points. There are a few exceptions above that. The top rate on the max platform today is 85 basis points, which is higher than the highest interest rate in the market. And you might ask well, how are we able to get such high rates? And the answer is that several of the banks on our platform offer preferential rates that are only visible on the Max platform. So they’re not advertised, they’re not available anywhere else. And the reason they do it is that, put yourself on the other side of the table for a moment, think about how a bank works. A bank makes loans, those are considered to be assets on the balance sheet of a bank, and then they need to fund those loans by taking in deposits. Those are considered to be liabilities since the bank owes money back to you. There are different classifications of deposit, but the most attractive classification is a core deposit where a bank has a direct relationship with the customer. And there are really only a few different ways to attract core deposits. One is you can build a physical branch and wait for people to walk in the store. That’s very expensive and more and more banks are realizing that physical branches are for the most part a big waste of money.
The second way you can do it is take out advertising. Either you can, you know, put ads on CNBC, or you can pay for placement on one of these listing services. But the problem with that is either you’re spending a huge amount on advertising, or you’re paying for every click-through whether or not the person opens an account. And what we figured out is that we could strip out all of that cost out of the banking system. So we do not accept advertising, we do not accept payment per-click, we don’t accept payment per deposit from banks because we wanted to create a system that was free from any conflicts of interest, simply best rate wins. And by stripping out all of that cost, banks can afford to pay a higher rate and still be just as profitable if not more so. So it’s really a win-win situation where the client is better off because they’re getting not only faster and simpler account opening, but also much more compelling rates, and the bank is better off because they’re getting larger, lower-risk customers, and their marginal cost of acquiring each customer is really close to zero. They basically just have to pay whatever it costs to write a new record to their banking core, which is their software that runs the bank, and the one KYC, know your customer check that they need to do. But other than that, that’s it. So we sort of found this really interesting, symbiotic relationship where it’s better for the bank and better for the customer at the same time.
Meb: Practically speaking, how often are these moving around? How often are the new accounts being opened? Is it like once a week, once a quarter, once a year? How does that kind of work?
Gary: So it’s not day trading, right, we’re not moving funds every day. By default, Max’s optimization, we call this sort of rebalancing of accounts and optimization. And by default, that optimization occurs once per month. You can change the settings within Max, you can request additional optimisations, whenever you want. You can tell it, “Look, I’m closing on a house in six weeks don’t do anything for a while.” So there’s a lot of flexibility for the user. But by default, this happens once per month. And the idea is that rather than have to pick a single bank, and hope that their rate remains competitive, you can pick multiple banks and we’ll automatically find which one is most competitive for you. The best analogy I can think of is, it used to be that when you wanted to buy a flight, let’s say you wanted to go from New York to LA it used to be that you went to a travel agent. And you’d walk into the travel agent’s office and they would sit behind a green screen and they would punch in something into the computer and they would tell you, “Okay, your flight is $600.” And then the airlines opened up their own websites, and they sort of tried to cut out the travel agent, said, “Well, wait a minute. Just come directly to our website, and you’ll get a 15% discount.” And that sounded great. But then you found yourself, All right. Well, now I’m going to go to American, and then I’m going to go to Delta, and then I’m going to go to United, and I’m going to compare all the prices. I’m going to find the best price and I’m going to buy my ticket.” And that’s how a lot of people pick bank accounts today. They research some rates as sort of at a single point in time and then they pick an account and they check the box and say, “Okay, I’m done.”
But the problem is that the banks are changing their rates all the time, much like airlines change their rates all the time. So imagine if you could go to a platform like Orbitz, or Travelocity, and you might find that flight from New York to LA. So that’s great there’s price discovery, you can see all the prices on screen. But what happens if I buy that ticket, and then two weeks before my flight, now United has a better price than American? Well, with airlines, you can’t switch the ticket but with banks you can. And so if we take that airline analogy, Max would automatically switch your flight from American to United. And if a week before the flight Delta has a better price we’ll switch you to Delta, as long as the flight times are the same those services are pretty much commoditized. So we can do the same thing with banking. So no, we’re not moving funds every day. But by default, once a month, we’ll check the rates and make sure that your money is in the best place. And if it isn’t, then we’ll just tell your banks to move it and it’s your banks moving the money, not us. We’re really just a communications platform.
Meb: So it’s a no brainer. Under this umbrella of free money. Obviously, you can’t really claim that on the podcast, SEC, and FINRA, and everyone else. But by the way, I just looked up apathy.com is for sale. My guess is they’re going for 10 grand, I don’t know we’ll see what they say. What do you guys charge? I assume this isn’t a charity. What’s the business model?
Gary: There’s no such thing as free in business. If it’s free, they often say then you’re the product. This is something that people are much more thoughtful about these days with social media as they realized how they were being monetized. We don’t monetize customers. And what I mean by that is, we don’t sell your data, we don’t cross-sell other products. I built Max for me, I built it based on what I as a customer would want. So we have very strict privacy policies, very strict focus on security. And the business model is really simple, which is we provide a service and you pay a fee for that service. So we charge our customers two basis points, that’s two one-hundreds of 1% per quarter or eight basis points a year for the service. That’s about half as much as a money market fund charges. And we’re delivering dramatically higher returns. So I was just looking earlier today, a Vanguard government money market fund today yields five basis points. Our system yields a top rate of 85 basis points. If you net our eight basis point fee, you’re still at 78 basis points. What is that? Almost 14,15 times the yield, and it’s same day liquid, it’s in your own bank accounts, it’s FDIC insured. And so we think it’s pretty compelling. And that’s the revenue model and it’s really simple and transparent so people can understand what they’re paying for and what they’re getting, and it’s simple to do the math. But that’s how our business works.
Meb: You mentioned Vanguard, and Vanguard is traditionally one of the lowest cost options, but a significant amount of this industry is not Vanguard. So there are plenty of money market funds, that once you account the fees and costs of the fund, you have a negative yield, so your cash is already yielding negative. Then on top of that, we have a very real issue for the tens of thousands of advisors, the good guys in the country that also layer on a traditional 1% fee. If you’re an advisor listening to this, ask yourself do I know what my cash yields in my brokerage accounts and then for my clients? If the answer for many is probably you don’t know, then that’s trouble particularly for clients, once you layer in all these fees. A singular great idea way to justify your fee as a fiduciary is to maximize that cash balance. Talk to us a little bit about how you guys work with advisors too.
Gary: This was actually somewhat accidental, also in the sense that we built Max and we started to see people reaching out to their advisors saying, “Should I use Max?” And the advisor would say, “I don’t know what’s Max, right.” And we realized we made a colossal mistake because we had reached individual customers before we had educated advisors. And so we started going to advisor conferences. First one we went through was a NAPFA Conference, which is the National Association of Professional Financial Advisors. It was great because it’s a roomful of fiduciaries. So we didn’t have anything to sell them we just wanted to talk to advisors and show them what we built and get their thoughts. And almost uniformly, we got two pieces of feedback. The first was, “Wow, as a fiduciary, now that I know about this, I can’t not use it.” That made us feel really good. Because the whole reason that this company exists was not to build a company it was to see if we could bring greater efficiency and transparency to this market for the benefit of individual investors. So that made us feel really good. But the second comment that kept coming across was actually more telling and turned out to be super valuable to us. Which is the advisor said this makes all the sense in the world to use your word Meb it’s a no-brainer. “But my client’s portfolio is typically only 3% in cash so why do I care?” And that was kind of a big aha moment for us because all the research we had done to date showed that the average high-net-worth household was keeping closer to a quarter of its assets in cash. I think the average was about 23% of a client’s assets were in cash and cash equivalents. And so we were trying to reconcile the 3% cash allocation in the portfolio to the 23%, in cash overall. And we sort of had this question of where’s the other 20%? And, of course, it’s sitting largely in the large brick and mortar banks where it’s earning next to nothing.
And so we started to talk to advisors about this concept of held away cash. It’s not actually the cash that’s in the portfolio that’s there for trading and liquidity. And you might be frustrated that your broker is not paying any yield on it, but you’ll probably keep it there anyway, and that’s fine. But what about all that other cash that you have, that’s either you’ve set it aside so you could be opportunistic in investments, or maybe you’re going to buy a house or a second house, and it’s just sitting there, and it’s dead money. So what we found is that Max could be an effective tool for those advisors to not only help the clients with the cash that’s in the portfolio but maybe more importantly, help them with their cash that’s outside the portfolio. And we found that if we could help provide visibility into those balances, then the advisors could provide more holistic advice. And in many cases, help those clients migrate some of that cash, out of cash and into higher beta strategies where the client could earn more over time. And so we built initially, it was our own dashboard that with client consent, the advisor could have visibility into those balances just read-only visibility. And then more recently, we built integrations into major reporting platforms like Morningstar and Orion, so that all that data can flow through into the reporting that the advisor is doing for his or her client. And that way, even if it’s not, “AUM” it can factor into the broader financial plan. And then over time, the advisor and client can work together and talk about what they’re saving for, and what are their risk tolerance is. And in many cases, this helps advisors grow AUM, and it helps clients earn more because at best cash will keep pace with inflation. And at worst, which is where most people are, you’re actually losing real value every year by not doing something smarter with cash.
Meb: Well, the thing about the cash yield is as an advisor narrative with their investors is that it’s tangible, it’s something they can understand. You start to talk about a lot of the advisor benefits, behavioral coaching, and tax loss harvesting is a little more complicated. But yield is a very simple concept for advisors. And you mentioned something at the end got into a little bit of the macro but how does this work things go negative? Do you think that’s a possibility here in the U.S? You think it’s a probability? You think it’s an impossibility? And then does that affect what you guys do, or does it make it even more important?
Gary: In the current administration, there’s been a big focus on just push rates as low as possible, and monetary stimulus is going to carry the day. And that’s one of the reasons why you’ve seen the stock market up so much. And there’s a disconnect between that and MainStreet, and the reality of a lot of people’s financial lives right now. And so I think in a democratic administration, you’ll see more of a push towards fiscal policy to solve this economic issue that we’re going through. So more emphasis on creating jobs and infrastructure and plowing money into the economy and sort of plowing money into MainStreet, as opposed to plowing money into Wall Street. But I don’t think we’re going to see negative interest rates. Europe experimented with this following the financial crisis, it proved very difficult to get out from under that as well. I think it would be a pretty bad thing for banks. And I think it’s important to keep the bank strong during this sort of market environment, they’re going to have enough loan losses on their books as it is. And you’ve already seen that in the stock prices of a lot of the major banks. So I don’t think we’re going negative with rates. But we are in a really interesting time in that we’ve simultaneously pumped about $600 billion into banks through the PPP loans. And another $2 trillion or so of customer money has flowed into the bank. So if you look at bank balance sheets, at the beginning of this year, it was about $13.1 trillion in deposits on bank balance sheets today, that’s about $15.6 trillion. It’s a massive, massive influx of money into the banks. And at the same time, banks don’t have very many good places to lend money. People are not opening new restaurants, right, no new movie theaters, no new commercial shopping centers. Even residential real estate, it’s really hard for banks to understand where the market is. At the same time, the banks are cautious about lending. There’s been this huge influx of deposits so all the banks right now are actually trying to get deposits off their balance sheets. It’s an odd dynamic, and that’s why we see rates go low, and I think we may see them go yet lower. Our goal is to always be above market. And if we look at the rates that MaxMyInterest has been able to deliver over the last two or three years, we’ve pretty typically been 20 to 30 basis points above market. So whatever the highest yielding rate you can find an online bank tends to be higher on the Max platform for all the reasons we discussed before.
Meb: You mentioned a third area that is obvious. I mean, I actually have a friend who has…I need to introduce him to you guys. They’re joking that they don’t optimize their business cash balance, where they had tens of millions of dollars, to my knowledge earning essentially zero. And this is even more important at scale. How do you guys work with Treasury at kind of a traditional corporate business structure? Is that a business you guys have started implementing?
Gary: Yeah, we do work with business accounts as well, it could be a business, it could be a foundation, a nonprofit, complex trust. So for more complex account types, they’re typically not served by the online banks yet. And so we found a partner it’s company actually based in Wisconsin, and we’ve been working with them for years to manage our own company’s cash. And they also work for Starbucks and a bunch of other large entities, they do a lot of work for municipalities. Around the same time that we were thinking about, how can individual investors earn more on cash, they were thinking about the same thing for commercial entities. So we’ve partnered with them whenever a customer comes our way, and we can’t serve their needs, because it’s a commercial account, we’ll send them to a company called the American Deposit Management Company. And they’ve offered special rates that are exclusive to Max. And so our customers are able to benefit from those rates, they’re not as high as retail rates. I think their top rate today is about 45 basis points. But most entities are earning zero on their cash. And it could be a residential corporation, it could be a small business. We found that to be a really good solution, it’s all FDIC insured, it’s typically liquid twice weekly, although you can get liquidity if you need it. And we found firm company, we found that to be really useful. And a lot of the financial advisors we’ve worked with have said, “Well, gee, Max is great for my individual customers but I also have…you know, that customer also owns a business, can you help them?” And so in that case, that’s where ADM is helpful.
Meb: As we started this new decade, 2020 is almost over thank goodness, what’s the future look like for you guys? I mean, this opportunity obviously, seems like major potential still, you know, haven’t even captured a fraction of the world of optimization here. What else are you guys thinking about though, is it just kind of blocking and tackling, you guys got some new ideas you’re brainstorming on, are you going to move this internationally, what’s on your brain?
Gary: We’ve got a lot of projects going on. One of the things that’s so invigorating about this is that every day we identify new opportunities. So we’re busy integrating new banks onto the platform, which is great for our customers and great for the banks as well. And as that network grows, we’re doing more and more with financial advisors, we’re building deeper integrations into a lot of the key pieces of software that financial advisors use both their reporting systems as well as their CRM. And then we’re also building out functionality which will enable other partners to white label the Max experience. As I mentioned at the outset, we don’t cross-sell other products, we don’t need to “own the customer.” We think of Max as much more of an infrastructure business, we’re the software that enables people to do better. And whether they do better under the Max brand name, or whether they do better under someone else’s brand name, all that we care about is that they’re doing better. And so I think you may start to see other banks and wealth management firms and other internet properties be able to deliver a Max experience in the context of their customer experience and their customer journey. And we think that’s great it’s another symbiotic way to help expose more people to the benefits of what Max can do for them.
Meb: I was tweeting about this other day and feel free to chime in. But going back to all these conflicts of interest, going to the struggles of the free service and who’s really getting taken advantage of. And we said look in traditional brokerages half like Schwab half is this cash a spread. And then you have other things like you have short lending revenue that they don’t return to customers, you have payment for order flow. I said you know what would really crush why wouldn’t you want someone to have a brokerage? So much like you guys, I want to pay them a basis point fee, I said, but I want you on my side. So come up with a brokerage that A, optimizes your cash. So you guys do that already. B, that in some form has the ability to roll up their short interest revenue as well as the payment for order flow and return a portion of that back to the consumer. I don’t understand why if you’re going to lend out my securities and you’re going to get paid to sit at all for order flow why shouldn’t I as the one with all the assets be getting a yield on that anyway, any thoughts? Terrible idea, good idea?
Gary: It’s actually a great idea. And I was thinking about this not as articulately as you’ve just laid it out. But I was reading “Flash Boys,” you know, Michael Lewis’s book to my son. And you could just see his eyes open wide about like, how is this even possible that individual investors are being abused this way, what’s crazy is that they’re still being abused this way. So one of the things that we did last fall, we added to our offering an optional high-yield checking account. So instead of linking your bank of America account, to Max in 60 seconds, we could open up a brand new checking account for you. Now a lot of people say, “Well, I don’t need a new checking account.” But we did it so that people could enroll for Max without ever sharing any logins or passwords. We did it so they could enroll with Max and use it regardless of where they banked, they didn’t have to have an account with one of the major banks to use it. And we did it for all reasons, focusing on what’s best for the customer. And in the process of partnering with the bank to be able to offer our own checking account, we said to the bank, we don’t want to earn any economics on this. Now, that’s a really unusual thing for bank to hear. Because most FinTechs are rolling out these checking account products so they can earn Durbin swipe fees, and earn float, and spread and all sorts of things. And it’s really the core of their business model. And we said, “We do not want to earn a dime on this account. We’re rolling this out simply because we think it’s better for our customers. And so we worked with the bank, and we said all the economics that you would have given to us, let us give it back to the customer. So the checking account itself most checking accounts pay zero, the checking account pays 20 basis points. It comes with free ATM access anywhere in the world, it comes with free wire transfers, both domestic and international. I mean how many times we’ve been charged for wire, free wires. And there were even some more economics leftover and so even rebate is part of the Max membership fee. In fact, for a lot of our customers, Max ends up being free if they choose to use Max checking.
The whole point was, let’s take all the benefits, all the value that’s being created, and give it back to the customer that shouldn’t be a novel idea. But that’s the way we think as a company, we’re really focused on the long-term. And the whole reason for creating the company was not to build a business to make money. And most of the people at our firm already had long Wall Street careers. The purpose of the company was let’s see if we can change the system. Let’s see if we can create a more efficient and transparent approach. And we’ll start with cash because cash is so simple. It’s one of the reasons why we started working with Dynasty Financial Partners. They’re a platform that helps advisors who are currently working at a large broker-dealer breakaway and form their own firms have become entrepreneurs themselves. It’s a tricky thing when a financial advisor leaves one of the large wirehouses, the first thing they have to do is call all of their clients and explain what they’ve gone and done. Why are you no longer at Merrill Lynch? Why are you no longer at UBS? And the reason we partnered with Dynasty on this is because Dynasty is really helpful to advisors with that transition. And the simplest way to explain to your client why you’ve left a large wirehouse and set up shop on your own is that now as a fiduciary, I can deliver the best solutions to you as a client. And as an example, let’s start with your cash. All these years, I could only pay you one basis point on cash because that’s how the firm made all of its money or half of its money. Now that I’m an independent advisor and a fiduciary, I can deliver the best solution for you on cash and that’s just one example of how I can serve you better now. And that’s proven really powerful. And as you pointed out, cash is so simple. It’s not like comparing one fund to another fund and the fees and what’s the performance been historically. It’s like this is just your own money in your own bank accounts and we can see plain as day what the interest rates are. And if the interest rates change, this service will automatically find you new ones and better ones. It’s been really rewarding to find those symbiotic situations where the customer can be better off, the advisor can be better off, even the custodian can be better off.
Meb, you talked about Schwab earlier and one important source of profit cash is for them and that’s all true. But Schwab has invited us to their impact conference for the last several years. And you might say, “Gosh, why would you give a booth to a company that’s helping sweep away cash?” And the answer is that actually, the cash that sits in the brokerage account tends to stay there because it’s there for grading and payment of fees, and rebalancing. What Max really does is bring in to view for the advisor all of the held away cash and that’s where the growth opportunity is. And so platforms like Max can actually help firms like Schwab grow their business. And so it’s a little counterintuitive at first, but when you actually once they dig into how people actually manage cash in their portfolios, it starts to all click. So that’s the broader mission is just anything that we can do to make people better off with no conflicts in a really transparent way that’s what we want to do. And I don’t know whether it makes sense for us to open a brokerage business, but we’d love to partner. If someone listening to this says I would love to build that selfless brokerage model where we earn a fair return but all these other fees and kickbacks go back to the customer. If someone wants to build that we’d love to partner with them on that and deliver compelling cash solution. I think it’s a great idea.
Meb: Good, listeners when you do make it investable so I can invest in the company because this idea is such a no-brainer idea, to me. What you guys have done for cash plying that to the brokerage model and say, “Look, we’re just going to endlessly tirelessly do things in your best interest, we’ll charge you a fair fee so we make some money too. But we’re not going to do all these things behind the scenes. By the way, you know, as an institutional money manager, a lot of these things like the short lending, the payment for order flow ends up in some cases, hundreds of basis points, so multiple percentage points on assets under management revenue in some cases. So it is not trivial how these brokerages are monetizing you. How do I sign up for a Max checking account? I pay a lot in wires, it’s so stupid, but I think Bank of America charges me 30 bucks a pop, where do I go?
Gary: It’s really simple you can just go to maxmyinterest.com and during sign up pick Max checking. And you don’t even have to sign up for the paid Max service, you can have a Max checking account and just you know, do nothing but that that’s perfectly fine. But we, of course, think that you’ll find the higher yield on savings also compelling, but it’s just that simple. Or if you have a financial advisor, ask them about MaxMyInterest and they can help get you set up and pre-fill the forms for you if you want.
Meb: You’ll see my account coming through don’t make fun of my middle name but I’m definitely going to sign up such cool idea. Where the name come from, by the way? It’s such an endearing name, I love it. It reminds me of like the 1-800-GOT-JUNK trucks like you immediately know what this is for. What was the inspiration for that?
Gary: We had some concerns early on it’s almost a little bit pedestrian, right but it’s just clear and descriptive. I’m not a marketing person, I’m sure if I were I would have come up with a name like blue orchid or purple porpoise or something else that’s little catchier, like Amazon. We mostly just refer to it simply as Max and the name max actually came from…and this is going to sound super nerdy. But in Excel, if you’ve got an array of numbers, and you’re just looking for the biggest one, the function is equals max and then parentheses the range of cells. So that’s where max came from, we kind of liked it because max could be a proper noun, it could be a verb, it could be an adjective, it can mean a lot of different things. And then our tagline is your best interest, which of course has a double meaning both earn the best interest rates possible, but also we’re looking out for your best interest. And that’s something that’s really meaningful to us.
Meb: If you’re an advisor or a business that wants to get in touch is the same route to get in contact?
Gary: Yeah, you can go to maxmyinterest.com and there’s little tab at the top for individuals, advisors, and businesses, or you can go to maxforadvisors.com or maxforbusiness.com. But either way, you’ll get to the same place.
Meb: What’s been your most memorable investment as you look back over the years? Anything come to mind, good, bad in between?
Gary: Yeah, there have been a bunch of them. I think the most important investments were the ones I made really early in my career where I lost money, I think it’s really important, I think it’s important for people to start investing early and understand how your body viscerally reacts, to loss and to gain. I think that some of the best investors are really good at managing those emotions. And I think the earlier you can have that feeling the better. But it’s funny when you’re starting on Wall Street, and they take you through all the charts of how stocks over time have always gone up. And as long as you have a long enough time horizon, you can withstand the ups and downs and so you should resist the temptation to sell. It’s actually one of the reasons why we think cash is a compelling asset class in the sense that if you’ve set aside enough to meet your needs for the next couple of years, if you have that privilege, then you become much less emotional. And you can resist the temptation to sell when things are down. But I remember in the midst of the financial crisis after telling myself that I would never panic and sell, I finally hit a day where I did panic and sell some of my equities. And the second I did it, I had this horrible feeling in the pit of my stomach, Zimmerman, how could you do that you’ve sworn you’d never do that. This must really be the bottom if you’re panicking. And so I went for a run. I was in Tokyo at the time and I went for a run around the Imperial Palace. And I ran a couple laps and I just kept beating myself up and I resolved on that run that I was going to take the exact amount of money that I’d sold and we agreed to put it back into the market pro-rata over the next 24 months. And that’s what I did and that turned out to be a really good return. And so I think you’ve got a strategy. A strategy is a set of decisions to be made or you’ve pre-made decisions based on different scenarios and you’ve got to stick to that strategy. And you have to resist the temptation to be emotional about it. And if you’ve got a good strategy and a good advisor by your side, just stick to that strategy and do whatever you need to do personally with cash or other assets, so that you can stay the course.
Meb: Easier said than done, of course. 2020, though I think is such a wonderful recent reminder for probably every person in the world, not just in America about having that cash reserve buffer. We posted a chart on Twitter, we’ll add it to the show links to not just individuals but also businesses. And it was like number of days of cash on hand that this business had and many it was like two weeks. Restaurants and so many businesses operate on such a thin margin that 2020 has been unbelievably difficult. And so I think you’ll see going forward you mentioned the high-net-worth individuals and family offices that put a quarter in cash investments. But it’s not just to sleep at night it’s also the optionality of when things do really poorly you have some dry powder. So many people want to for some reason, optimize to the double-digit on putting all their money to work, leverage investing. And there’s nothing wrong with cash as long as the cash is earning something not under the mattress, which my grandfather literally used to do, but actually earning something I think that’s important. Gary, it’s been a blast thanks so much for joining us today.
Gary: Meb, thanks for having me it’s been a pleasure.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us email@example.com. We love to read the reviews. Please review us on iTunes and subscribe to show anywhere good podcasts are found. My current favorite is Breaker. Thanks for listening friends, and good investing.