Episode #471: Gary Zimmerman, MaxMyInterest – SVB, FDIC, & Improving ROI on Cash

Episode #471: Gary Zimmerman, MaxMyInterest – SVB, FDIC, & Improving ROI on Cash

 

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: 3/14/2023     |     Run-Time: 57:57

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Summary: In today’s episode, Gary shares what exactly has happened with the Silicon Valley Bank situation. Then he shares the risks people are exposed to with cash balances, why MaxMyInterest helps investors earn alpha and avoid what happened with SVB, and how his clients are earning over 5% on their cash balances today.

Click here for a special offer for listeners of The Meb Faber Show and sign up for MaxMyInterest today.

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Links from the Episode:

• 2:22 – Welcome Gary to the show; Episode #471: Gary Zimmerman, MaxMyInterest
• 6:29 – How uncommon it is for people to understand FDIC insurance coverage
• 9:49 – Overview of what happened at Silicon Valley Bank
• 21:09 – The prescription to avoid another collapse and the premise behind MaxMyInterest
• 28:08 – Why no one does what MaxMyInterest does at the level they do
• 35:18 – Risk management policies around cash and why hold so much to begin with?
• 39:14 – Knowing who stands between you and your money
• 41:52 – Whether or not your money is safe and the future of FDIC insurance
• 47:11 – How much investors should be thinking about SIPC
• 49:09 – Where do we go from here?
• 52:28 – What the future looks like for MaxMyInterest
• 55:02 – Learn more about Gary & sign up for MaxMyInterest with a special offer for listeners of The Meb Faber Show http://www.maxmyinterest.com/invitations/mebfaber

 

Transcript:

Welcome Message:

Welcome to the Meb Faber Show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better Investing starts here.

Disclaimer:

Meb Faber is the co-founder and chief investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cam’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

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Meb:

Welcome everybody. We got an awesome show today. Our returning guest is Gary Zimmerman, founder of Max My Interest, cash management platform that helps you maximize the return on your cash. Given the recent events with Silicon Valley Bank, we had to have Gary back on the show. In today’s episode, Gary shares what exactly happened with the Silicon Valley bank situation. Then he shares the risk people are exposed to with cash balances. Why Max My Interest helps investors earn alpha and avoid what happened with SVB and how his clients are earning over 5% on their cash balances today. Please enjoy this episode with Gary Zimmerman. Gary, welcome back to the show

Gary:

Meb, it’s great to see you again.

Meb:

Where do we find you today?

Gary:

I’m in New York City.

Meb:

Last time we spoke, which would’ve been in 2020, I feel like you were pandemic stranded in Canada, not stranded. Maybe they’re by choice, but you were in Canada, right?

Gary:

We were. No, we were supposed to go away on just a family trip. We were going to go to Tokyo because we lived there for a few years actually during the financial crisis and we were going to take the family back, now that our kids are a little more grown. And obviously the pandemic hit and that got canceled. And so we went up to see my family in Canada for what we thought was a week and it turned into 15 months. So that was more than a week, but we had a great time. Anyway, we’re back home now. It’s great to be home.

Meb:

Well, we did a topic with you and listeners we’ll put the original show on the show notes if you want to go listen to it. It was a slightly different time, despite being the zombie apocalypse. This was back when bond yields were down around zero and they’re not anymore. And then we had a lot of trepidation, excitement, panic, I don’t know all of it this past week with one little bank in California, another one elsewhere. But you had a great quote from the last episode that I feel like would be a good jumping off point and then we can kind of talk about what the hell’s going on. When you say cash needs to be safe and liquid. And I feel like a lot of people at this point are waking up to that and thinking about it in retrospect. But talk to us what’s been going on in the world and we’ll dig in from there.

Gary:

Well first of all, Meb, thanks for having me back it. It’s great to see you and great to be with your listeners again. It’s funny because we’ve been working in relative obscurity for about 10 years since the last financial crisis, focusing on that very same thing, which is cash should be safe and liquid. And we would add a couple more things to that, which is it should be diversified and it should be earning as much as possible. And it’s interesting because you talk about the zero rate environment, and there’s a lot of research that shows in our experience has also been that when rates are below 1%, people become pretty apathetic about cash. But as rates start to rise and inflation took hold, actually inflation took hold and then rates started to rise, people are starting to focus on cash a little bit more and they started to become a lot more focused on is my cash keeping pace with inflation? Am I earning all that I can?

And so our business Max My Interest grew quite rapidly because of that. As people started to pay more attention, as their financial advisors started to pay more attention. And now all of a sudden, almost 14 years to the day that I started focusing on this, when the bank where I work nearly collapsed during the financial crisis, here we are 14 years later and there’s panic spreading through the streets. And I think it really largely is panic. Fundamentally, and we’ll talk about this in more detail, but fundamentally while there are some issues, we don’t see any big systemic issues in the banking sector, but any bank can be susceptible to a bank run regardless of the size of the bank because banks, by virtue of their business model, do not hold all of your deposits in the local branch where you deposited them.

They lend them, they leverage them. And so the banking sector works really well unless everyone wants their money all at the same time. And exactly what’s happened, certainly in the case of one bank over the last week, and I’m hopeful that calm will prevail and that we’ll return to a sense of normalcy. But there are a lot of people who are really questioning for the first time, gee, I need to be more thoughtful about where is my cash and is it fully insured and is it diversified and is it earning all that it can? And I think that that’s healthy if there’s sort of a silver lining in all of this, it’s that it will prompt both individuals and corporations to think about the different risks, right? Single supplier risk, a concentration risk, correlation risk, and just make sure that they’re being thoughtful about cash just in the same way that they are about every other asset class.

Meb:

It’s kind of a story as old as time. If you go back to the long history of money banks in the United States, banks fail not too infrequently. It’s kind of scary to hear that, but you look at a chart, think of something like 500 banks failed in the last decade, but in general, people were protected. And I did a poll on Twitter yesterday, and I think it’s biased because my audience is very quant nerd, high level finance. My stuff’s too boring to listen to if you’re kind of just retail investors. But even then it was almost half the people. I said prior to this week, did you understand what FDIC SIPC was? And almost half said no. And so I expect in the broad population, it’s even lower than that, right?

Gary:

I think that’s right. I mean your audience is sophisticated, but you’d be surprised at the number of heads of brokerage firms that I meet with who don’t understand FDIC insurance coverage. They don’t understand how it works, they don’t understand the limits, and that’s fine. The economy is built of specialists and I’ve focused on nothing else for the last 10 years, but understanding the banking sector, how that ties into wealth management, liquidity insurance, all of those things. And that’s great and we can all learn from each other. And there are a lot of your other listeners who know an awful lot more about basically everything else than I do. And so I think it’s great to sort of focus people on, now’s a good opportunity just to learn. And it’s not a very complicated thing. FDIC insurance coverage is actually very simple.

It was started in 1933 in the wake of the Great Depression by FDR. And the idea was that as an individual depositor, you don’t have the tools and capability to measure the soundness of the bank where you keep your money. In fact, I would argue over the last week there were a lot of equity analysts who spend their whole life focused on this who or maybe even regulators who didn’t appreciate the risks that were inherent here. And so the whole idea behind FDIC insurance coverage is to basically create an equal footing for all the banks and to say, as long as you keep your deposits below the FDIC insurance limit, it doesn’t matter which brand is on the front of the branch, doesn’t matter which name, it doesn’t even matter which risk they’re taking in their portfolio. You are insured and protected by the FDIC, which is backstop by the full faith and credit of the US government. And so you can sleep soundly at night as long as your deposits are below the FDIC insurance limit.

And if you have more than that amount in cash, which most of our customers do, and a lot of your listeners I’m sure do, then you can protect yourself by spreading that cash out across multiple banks. And that actually gives you multiple levels of protection. It’s not just that it gives you increased FDIC insurance coverage, it also gives you diversification and liquidity. And those turn out to be really important things because if your bank fails and it’s covered by the FDIC, your deposits are covered, you’ll get your money back. But what if you need to pay your tax bill that day? And so by having multiple sources of liquidity by spreading your cash out across multiple banks, there’s no single point of failure and so much in the way that an auto manufacturer might have three different sources of supplier for door handles or glass. As a customer, you should have multiple sources of liquidity for your cash position.

Meb:

I mean, the silver lining of crisis is often that legislation and systems get built after the fact that hopefully makes the system more robust. You talk about FDIC, you talk about the genesis of your company was really post-financial crisis, if I recall. And here we are again kind of going through something similar where a lot of people are waking up to, and there’s a lot of cross currents involved in this story, of course. There were sort of irresponsible decisions made in a lot of different places. Maybe give us an overview. We’ll talk about Silicon Valley Bank specifically, and then we’ll talk about what you guys do and how you guys think about dealing with customers as well. But let’s start there. What went down last weekend? Give us the kind of cliff notes version of what happened from an insider.

Gary:

Sure. Well, what happened at Silicon Valley Bank was a classic old-fashioned bank run. This was not a question of solvency, it was really a question of liquidity. And so the question is why did it happen, right? Because in theory, any bank could be subject to a bank run on any given day. It’s sort of like a flash mob, right? If enough people agree to all coordinate their actions and pull money at the same time that can happen. And with social media, maybe it can happen even faster than it did in the old days where if you think back to one of my favorite movies, It’s A Wonderful Life. There’s a bank run because they lock the doors and that panics people and then they all start to line up and other people walking by in the street see people lined up by the bank. And rumor spreads, imagine that now magnified with social media and Twitter was a glow over the weekend with all sorts of questions and thoughts and speculations.

But the question is, what’s the impetus for this, right? Because a bank run could happen any time, but 99 and a half days out of 100 it doesn’t happen. Why did it happen this time? And I like to think of, I don’t like to think of bank runs at all, but if I am going to think about a bank run, I think of it sort of like a forest fire where there’s a spark and a tree catches on fire and that stretches to the next tree and the next tree and the next tree and the next thing you’ve like decimated the forest. And in this case, in the case of Silicon Valley Bank, I would argue that the tinder was already bone dry. And so there was a spark. I think most speculation is that the spark that caused it was a certain well known venture capitalist telling his portfolio companies to pull their cash. And that in turn spread pretty quickly because Silicon Valley is a pretty tight-knit community.

So that was the spark, but what actually created the conditions for the forest to be susceptible to forest fire. And there are really two things at play here. The first is something that concerned me about SVB as a business model for many years. In fact, I started warning venture capitalists about this back in 2015, which is that their business model was fairly unique among banks, and it’s both what made them so successful and grow so quickly. And also what ultimately made them quite risky in my view. And that is that their business model was actually very simple, which is they form relationships with investment firms, primarily venture capital firms. And they became a willing lender to early stage startups, early in growth stage startups who might otherwise have had difficulty obtaining loans from other banks.

And they built a real specialty in understanding how to underwrite these earlier stage companies. And that’s a real need in the market, and they think they did a really great job of it. But the problem is that their relationships with these investment firms were so close that there was basically a quid pro quo in there which said, if you agree to lend to my portfolio company A, I will give you the cash raised by my portfolio company B when they go raise capital. And so you had a very concentrated and highly correlated deposit base, right? Silicon Valley Bank was not accepting $10,000 deposits or $100,000 deposits or $250,000 deposits from individual retail investors. What they were accepting were $20 million and $50 million deposits from startups. And the concern and the reason that I felt that Silicon Valley Bank was risky, it’s not so much that I had concerns about their ability to underwrite these loans. It was that there was a very high correlation risk in their business model.

Which is, if you think about it, the precise moment in the business cycle at which these startups would start to default on their loans correlates very highly to the point in the business cycle where very few new companies are able to raise venture capital in size. And so the loan book and the sources of new liquidity for the bank were highly correlated. And I viewed there to be some risk there. And so I started speaking with VCs, many of them very prominent about this risk. And what was interesting is they were very, as you’d expect, very thoughtful about it. And they said, Gary, we acknowledged the risk that you’re highlighting. You’re absolutely correct that by keeping funds above the FDIC limit, we are at risk. But the scenario in which Silicon Valley Bank fails because all of these underlying loans go bad is this scenario in which I’m probably going to lose all of my investments anyway. And so I don’t care.

And I thought, well, gee, that’s actually kind of an interesting perspective, but perhaps maybe too simple a perspective. And it also potentially ignores or reframes the difference between am I thinking about my investments individually or am I thinking them as a portfolio? Because from a portfolio perspective, if I subsidize one portfolio company by taking risk with a different portfolio company, am I meeting my fiduciary duty to my LPs in the fund? Probably. Right, because they’re invested in the fund. But it creates some interesting conflicts of interest at the individual portfolio company level where I’m taking risk with one portfolio company to basically subsidize and support a different portfolio company. And so when we would meet with founders, whether they’d be the CEO or the CFO, and we would ask them about that concentration risk they were taking, they would basically say, that’s up to my VC, I have no control over my own treasury function.

And so I think it’ll be interesting to see how this plays out and whether people start to rethink governance a little bit in terms of who has a fiduciary duty to whom and how do we think about risk and how do we think about single source relationships? But I mentioned all of this because it was that concentration of deposits that made the tinder dry. It was the fact that more than 95% of Silicon Valley Bank’s deposits were uninsured, that as soon as you think there’s risk in that bank, everyone’s going to pull all of their money. And what they hit was the liquidity crisis. And so when it started to happen, Silicon Valley Bank fell victim to the same issue that frankly plagues a lot of banks today, which is the mark to market on available for sales securities often called AFS securities.

Okay, now we’re going to get really geeky for a second into banking, but this is what’s causing the market to be spooked a little bit across a lot of banks. Which is, banks are in the business of originating loans, right? Lending money. Most people think of a bank as a place where you deposit money, but that’s just a source of funding. The bank is in the business of originating loans, making smart lending decisions, figuring out to whom they should lend, how to price those loans. But then the back half of that business is, okay, well then how do I manage my balance sheet for both duration and risk? And so the other half of the bank is how do I source deposits and how do I make sure that the duration of those deposits matches with the duration of the loans? Well, the reality is you can’t actually match that perfectly.

Banks make money in part by borrowing short-term and lending long-term, right? They’ll lend to a 30-year mortgage, but your deposits with the bank, you can withdraw any day you want. And a bank works sort of on the law of large numbers, which is in on average on any given day, only a tiny fraction of 1% of my customers are going to withdraw their money. And so I can take that duration risk and I can earn spread based on that duration and time value of money. What happened with Silicon Valley Bank as I understand it, is that during the pandemic when interest rates were zero and money was free, and venture capital firms were deploying countless billions of dollars into new companies, so much money flowed into Silicon Valley Bank that they had more deposits than they could lend out. Now, that sounds like a great problem to have, but what they did to earn money on those deposits were they bought longer term treasuries.

And when interest rates rose so quickly, the value of those treasuries on a mark to market basis fell significantly. If I buy a five-year treasury or a 10-year treasury and it’s yielding 2%, and now rates rise in that and the prevailing market is 4% for a 10-year treasury, well now if I had to sell my treasuries today, I wouldn’t get 100 cents to the dollar on them. I’m going to get a significant discount because any buyer would say, well, if I’m going to buy a 10-year paper, I can get 4%. So why would I buy your 2% paper? And so a lot of banks have this problem now where they’ve built up this portfolio of treasury securities that are underwater, and individual investors have this issue too. I mean, buying bonds, everyone thinks that bonds is being safe. I think a bonds is being super risky.

I basically don’t own any bonds because I feel there are a lot other people who are better at bond math than I am. But anyway, so banks are holding these portfolios of long-term bonds and they’ve declined in value. And again, if they hold them to maturity, they’ll get back 100 cents in the dollar. But if they’re forced to liquidate them on short notice, they’re going to take a loss. And that’s what happened with Silicon Valley Bank. They had to sell 20 billion of these treasuries at a loss that left 1,000,000,008 hole in their balance sheet from an equity cap perspective, and they had to go out and raise money. And for better or for worse, I would say for worse, people smelled blood in the water and the bank run accelerated and there was no amount of capital they could raise to get out from that situation, they collapsed very quickly. Very, very rapid collapse for a $200 billion institution.

So the reason that there’s so much volatility in bank stocks right now is everyone’s looking around and saying, okay, which other banks have the concentration risk that SVB did? I can’t really think of any that have nearly as high percentage of uninsured deposits, but there are some that have high percentage of uninsured deposits. And those stocks have been hit this week because of the worry, not over solvency, but over liquidity, which is what would happen if those customers were to become scared and try to withdraw their money. But the other issue where people are looking at bank balance sheets and saying, okay, look at all the banks that have large amounts of AFS securities that are underwater right now. Again, no problem if they can continue to hold them, but if they were forced to liquidate them, would they take a hit to their equity?

And while the bank may, there may not be a bank run, they might have to issue new equity on a dilutive basis. And so that’s happening right now. I think cooler heads will prevail. I don’t see systemic risks in the sense that we had during the financial crisis. In the financial crisis, the issue were that banks were sitting on trillions of dollars of mortgages that were underwater. And because a lot of those mortgages were resold, they couldn’t just hold them to maturity. So I think the situation today is different, but that’s long story short, that’s what I think happened with SVB.

Meb:

And we don’t need to spend too much more time on SVB. I feel like it’s kind of getting well covered at this point. People are probably getting a little fatigued, but there are some unique aspects that are kind of fascinating. One is the vast majority of the banks people, a lot of people are below the 250 requirement. In SVB, it was like 90 some percent uninsured, but also there’s always been bank runs. But the first time ever, it was at internet speed. I mean 42 billion coming out in one day. Thanks Peter Teal. You can say his name. Is an astonishing, very quick situation. And so I like to talk more, so much in the media likes to talk about the diagnosis. Let’s talk more about the prescription. And we’ve known you guys for a long time. Full disclosure listeners, have an account at Max My Interest, but this was an interesting topic a couple of years ago when we did the discussion when interest rates are zero and you guys are offering, Hey, you can open account and we’ll maximize and we’ll get you around 1%.

It’s really interesting now because we did a poll and we asked people, and this was I think before this went down, but it was like, what are you earning on your safe money checking account, savings account, whatever. Forget how we phrased it, but it was like zero to one, one to two, two to three above three. And then of course there’s like, I don’t know. And the vast majority of people were earning either zero or I don’t know, which means if you don’t know, it’s zero. And so I joked, I said, there’s so much all day long. How many hours a week do people spend on what’s the right investment? How much should I have in stocks? How should we be investing in gold? All these investing decision. And there’s this huge giant source of free alpha that’s staring you in the face and everyone’s like, nah, I’m just going to ignore that. So tell us how you guys operate, what do you guys do? And we can go down the various rabbit holes there.

Gary:

Sure Mab. So Max My Interest was built following the financial crisis really is a way to help keep cash safe and liquid. And the premise was really simple, which is I had an existing brick and mortar account at one of the big four banks. That was my quote, relationship bank. I still have an account there. I’ll probably forever have an account there. Those relationships are really, really sticky. But the problem is that there are really two problems. Number one, while they’re great at credit cards and mortgage and loans and all the other things I might need, they don’t pay competitive rates on savings accounts. And they’re not structurally set up to pay competitive rates on savings accounts. Because they’ve got a really big heavy brick and mortar infrastructure. And there emerged more than a dozen years ago now, almost 20 years ago, a number of online banks, they used to be called internet banks and now they’re called online banks.

Some people call them direct banks, but basically it’s a bank, but they don’t have physical brick and mortar branches because that’s not how they originate loans. And they’re able to operate at much lower cost structure than a brick and mortar bank for reasons that are sort of obvious. And I looked at these online banks and I said, well, they look kind of like Amazon 1.0, right? Amazon 1.0 is the idea that I can sell college textbooks online. And because I don’t have to pay for the campus bookstore, I can sell that exact same textbook at a lower price point. And that in my mind, that’s what the online banks are. What we built was effectively what you might call Amazon 2.0, which is the marketplace that enables you to go to a single place, see all of the bank accounts that are available, and then through the sort of equivalent of one click ordering, put them in your basket and say, all right, I want an open account at these five different banks and spread my cash across those banks.

And now they’re my bank accounts. I hold them directly, I can access and I have diversity and liquidity whenever I want, same day liquidity. But the neat thing about Max is what we do for customers on an ongoing basis after they’ve sort of opened those bank accounts in a minute or two, is we monitor interest rates, we do what you don’t have time to do, which is we keep on top of it for you. And when our software notices that there’s a higher rate available, we, at your direction, communicate with your banks and tell them to move money between your own accounts. So Max is not a bank, we’re not a custodian. We never touch any money. We’re not an intermediary. We’re really sort of like an air traffic control tower and we just look out over your bank accounts and tell your banks whenever you want to move money and then your banks move the money from your account at Bank A or account at Bank B.

And the neat thing about that approach is it confers a number of benefits to the customer at the same time. Number one, you are fully FDIC insured. So whether you’ve got $100,000 or a million dollars or $5 million, we can help you spread your cash across enough banks so that you’re always fully FDIC insured. Number two, you have same day liquidity because you hold all of these accounts directly in your own name. And that’s really important because there’s no single point of failure, even if one of your banks goes under and you’ll get repaid by the FDIC and the next day or two, you still have liquidity over all of your accounts at all the other banks.

And number three, by actively monitoring rates, we can help generate real alpha. And in fact, on our website, maxmyinterest.com you can scroll halfway down the page and there’s a little line that says, learn about the benefits of active cash management. And you can see we’ve done back testing analysis since inception nine years ago, over the last five years, three year, one year, how much alpha we’re generating, not just relative to the national savings average, which is what you might earn at a brick and mortar bank, but the alpha that we’re generating over and above the leading online banks. So today, the online banks that spend the most money on advertising are paying 3.5, 3.6, 3.75%. Our top rate is more than 5%.

Meb:

Hey yo, let’s go.

Gary:

Yeah. And people say, Max, how are you able to get so much better interest rates than anyone else? And the answer is really simple, which is we take cost out of the banking system. So if you go to one of these rate comparison websites, every time you click on a bank, the bank has to pay the rate comparison website a fee. If you see an ad for a bank in the Wall Street Journal or on CNBC, the bank is paying to acquire you as a customer. And we look at all that and say, well, gee, that’s like just wasted money. If banks didn’t have to pay to acquire customers, they could afford to pay higher rates to the customer in the first place.

And so that’s what we do. We basically strip cost out of the banking system, and there are a lot of banks on our platform that offer preferred rates that aren’t available anywhere else because they know that with Max they’re getting really high quality customers with larger average balances, with highly predictable deposits, and they don’t have to pay anything per customer to acquire them. We don’t accept advertising or per click revenue because we view that would be a conflict of interest. So we tried to operate a platform that’s sort of more like Switzerland, it’s just best rate wins and the banks can sort of bid for deposits based on how much they need on any given day.

Meb:

There’s a few different avenues we could start to walk down. One is why don’t people do it? So they heard this description and there’s a handful of places I feel like that do something broadly similar. I don’t know anyone that caters to, and you can describe it because there’s a lot of financial advisors listening, there’s a lot of businesses. You guys do both. It’s not just you have partnership with I think registered investment advisor companies or brokerages. You also have business accounts as well as individual. Tell us about the very spokes of this because I don’t know anyone that actually does all of these.

Gary:

So no one does what we do the way that we do it, we believe we do it in the safest, most liquid, highest yielding way. And Max was actually built in response to the existence of what are called brokerage deposit solutions, which is sort of what existed before Max came along. And this is actually what was pitched to me in the middle of the financial crisis. And I studied it in detail and I said, whoa, this is riskier than advertised. I don’t want to do this. So the old-fashioned way to do this, which is what the brokerage firm still sell, it’s called a brokerage deposit or brokerage CD. And basically the way it works is you give your money to an intermediary and they turn around and they resell your deposits to other banks. And the problem with that is that number one, you don’t know where your money is, and they may have sold it to a bank where you already have another account. And so you may end up with overlapping deposits and you may not be fully insured. That’s risk number one.

Meb:

The stock equivalent is a wash sale situation. You sign up for this direct index that’s doing these thousands of trades and you’re like, wait a minute, I already owned some of that. And so it’s important to-

Gary:

You’re long and short at the same time.

Meb:

Yeah.

Gary:

So here you’re long both at the same time and you might not be fully insured. But the other risk is that whichever institution you send that money to initially holds these omnibus accounts, which in my mind are really scary. This is why people couldn’t get their money back from FTX because they were told it was FDIC insured, but it was actually held in the name of FTX at all these other banks. So if FTX goes under single point of failure, you lose access to all your money even if it isn’t insured, and people are still waiting there. So our view was don’t go through an intermediary or a broker. You should hold your money in your own accounts directly in your own name, and that’s what Max does. So that’s sort of how it started out was to try to solve for safety and liquidity and diversification. And then we sort of stumbled upon the ability to help people earn higher yield at the same time.

So the question is why don’t people do it? People do it. Lots of people are doing it. I just looked at my Max account earlier today, I was doing a demo for a bank and had I kept my money in my old brick and mortar bank, I would’ve earned about 80 basis points over the last eight years. And with Max, I’ve earned 17%. So that’s a lot of alpha. Now the question is how do people find out about it? How do they do it? Because we don’t advertise direct to consumer. Most of our customers come to us through financial advisors, and most of those are registered investment advisors and they bring Max to their clients because it makes them look smart and it helps them bring held away assets into view because most advisors can give better financial advice if they see the totality of the client’s cash.

And it’s funny because we’ll talk to advisors and they’ll say, well, this makes all the sense in the world, but I can only think of three of my clients who have enough cash for this to matter. And you’re like, really? You have 150 clients and you think only three of them have 100 K in cash? You must have really bad clients. And of course, they don’t have bad clients. What they’re doing is they’re looking at the cash that’s in the brokerage account. The cash that’s in the brokerage account is there for trading and liquidity. It can stay there, that’s fine. But that client who has 100 K in their brokerage account probably has 800,000 or 2 million of cash sitting in a large brick and mortar bank somewhere. And so the opportunity we saw was let’s help financial advisors deliver value to clients on money they don’t even manage, right? This is for held away cash.

And in the process, the clients will share that information with the advisor. The advisor can flow that into their financial planning tools like MoneyGuidePro or eMoney. And now that they see all of this cash, they can provide better, more holistic advice and better planning. And that’s really how we’ve grown. And today we’re working with advisors from about 1500 or 1600 wealth management firms and they use Max because it makes everyone better off. Advisors better off, clients better off. But I think the more interesting thing, part about your question is, okay, well great, that’s like some subset of the population. What about everyone else? Isn’t this a total no-brainer? And that’s the term that keeps coming up over and over again. People hear about Max and they say, that’s a no-brainer. So why don’t we have 100% market share?

Well, we have three major competitors, and those competitors are awareness, apathy and inertia. And I remember the first time I said this to someone, they were like, is that apathy.com? And I’m like, no, no. These are concepts, right? Awareness is, per your Twitter poll. People don’t know they could be doing better. They might not even know. They don’t even know what they’re earning right now. If all your listeners go home and go pull out their bank statements and take a look at it, and they’re like, gee, I could be earning 5% and I’m currently earning five basis points. But the reality is that people are busy. And so awareness leads into apathy, which is okay, I know I could be earning more, but I just don’t care. Well, gee, that’s a really interesting one to unpack. Why don’t you care? I still compare the prices in the supermarket.

I care, I care about every dollar. I feel like really good investors focus on the details in the same way that I dug in on the details on why your broker deposit is risky. It’s like, just ask why people, your listeners are intellectually curious. So the apathy one’s a really interesting one to unpack. And what we’ve learned is that, and most large brokerage firms, they make more than 50% of their profit based on the spread they earn on client cash. Stocks and bonds are a red herring. The brokerage business is about cash. And so the last thing they want you to do is think critically about your cash balances. And so when clients ask their broker, Hey, what about my cash? The broker kind of belittles it. It’s like, oh, you don’t need to worry about that. I’m here. Let’s worry about stocks and bonds. But the reality is there’s trillions of dollars sitting idle in brokerage accounts earning basically nothing.

And the third one, which is actually perhaps the most important one, is inertia. So what is inertia? Inertia is, okay, Mab, I heard your show. I get it. I’m aware that I could be earning more. And I’ve overcome the apathy. I know I should be earning more, but I have 20 things on my to-do list, and this is never going to be the top thing on my to-do list. Now, in the last few days when people are panicking about banks and our site traffic has gone through the roof, people are putting it to the top of their to-do list, but a week or two from now, it’ll fall back down on your to-do list.

And we have customers who come to us all the time, they’re like, oh, I heard about this a year ago and I didn’t bother doing it, and now I’m finally signing up. I’m like, well, that’s great. You’re helping yourself, but you missed out on $40,000 of interest income last year. So like everyday matters. So I think overcoming awareness, apathy and inertia are really, really important. But fundamentally, this is all behavioral economics. And the reality is that some people just won’t prioritize that. And so be it.

Meb:

Do you know the apathy.com is for sale, by the way, maybe you could pick it up on the cheap. Schwab’s, I mean the brokerage and sort of bank cash model. A lot of people don’t know this. I mean, I think Schwab gets well over half of their earnings from this spread. And in fact, this is something that I was very vocal about when they launched their robo-advisor. And look, I think there’s plenty of good things about Schwab, but there’s often decisions that get made somewhere in the cog where you look at them and say, Ooh, that’s a really just gross decision. And Schwab, when they did their robo-advisor, they forced investors to have a large cash allocation, and then they paid very, very little when they could have paid a lot. So as a fiduciary, and we used to do polls, we say, are you a fiduciary if you choose to pay zero when you could pay more? And there’d be no differences. No trade-offs.

And everyone’s like, no, of course not. And Schwab got to fined $200 million for this single decision. But there’s other worries where if your cash is hit an account and they’re not the fiduciary or they’re not in charge of managing it, they’re like, well, it’s up to you. You have to choose. It’s not our fault if you leave it at zero. So listeners, as always, the lesson is you need to take control of your own destiny and finances because it’s important. And so obviously this last week I imagine has been an exhausting period for you, just the amount of in-bounds I imagine you guys are getting. And that’s great. How much of the discussion is sort of under the business umbrella? Because I feel like a lot of the Silicon Valley Bank discussion is like, yes, there’s the individuals, but the people that were really freaking out were Roku had a quarter of their money there and Circle had 3 billion.

All these companies that had payroll and day-to-day expenses, they’re running through this checking account that has no protection and things could have easily, in my mind, gone a slightly different way where they got back 80 cents on the dollar and it got stuck for six months. How much of the discussion now is this kind of coming from the business channel? And is there anything different that they should be thinking about when they think of Cash Treasury solutions and how to deal with big amounts of money? Because a lot of these are like, look, FDIC 250 grand. They’re like, I’m sending out 250 grand a day on these various checks and payments. What’s the best practices there? How should they think about it?

Gary:

It’s a really interesting question Mab, and this is fundamentally, this is a question for controllers and treasurers and CFOs and boards, which is what is your risk management policy around cash? Are you properly diversified in your banking relationships? Have you ensured as much as you possibly can? We understand that people have operating accounts and funds flowing in and out and you may not be able to fully insure it, but the other sort of question is maybe think more critically about why are you holding so much cash? And this is the same discussion that financial advisors have with clients who start to use Max for their personal cash. The client who they thought had 100 K cash and now they find has 800 K in cash. It prompts some interesting discussions. What are you saving for? What are you planning for? Is there an event coming up that I’m not aware of? Is your risk tolerance different than what you filled out on the risk questionnaire when we first started working together?

And so I think the same questions are relevant for companies. If a company is hoarding cash, are they building a war chest? Are they planning acquisitions? Ought they to consider dividends or buybacks? And we’re not really here to opine on any of that, but I think a good board asks good questions to make sure that management is being thoughtful about everything. Is your decision to work with a single bank a deliberate decision or an accidental decision? Is your decision to hold cash versus T-bills versus money market funds versus other instruments. And money market funds are not without risk either, especially prime funds can be quite risky.

Meb:

Can you explain that while we’re there? We can’t just skip over that.

Gary:

Oh, sure.

Meb:

What do you?

Gary:

Yeah, so I mean, again, it all goes back to who’s standing between you and your money? If I hold an account directly at a bank and my name is on the account and I can walk into the branch or call up the bank and wire funds out same day, in my mind that’s the safest, most liquid way to hold cash. We talked a little bit about deposit brokers where now you’re putting an intermediary between you, your money’s no longer titled, it’s like the account’s not in your name anymore. So you can’t call the bank and get your money directly. That adds a layer of risk. So money market funds are a pooled vehicle, and we saw during the financial crisis, the Reserve Primary Fund broke the buck because effectively there was a run on the money market fund, just like there can be a run on the bank. And if that fund has to liquidate all of its securities at once, it may not be able to get 100 cents the dollar on it.

So money market fund is sort of a, people call it a cash equivalent or a near cash equivalent, but it’s not quite as safe as holding money in the bank, that insured money in the bank. Now what are the underlying securities? Well, if you’re buying a government money market fund, that’s pretty safe because they’re holding T-bills mostly. And so you understand the underlying credit risk. But what happened after the financial crisis is the SEC forced the industry to make a distinction between government money market funds and prime money market funds. And the word prime is really misleading because prime sounds great, right? I’m going to go to steakhouse saying I’m going to go prime sake. That’s better, right? No, prime is worse. Prime is much worse because a prime money market fund can hold repo. They can hold commercial paper, they can hold all sorts of foreign securities. They can hold all sorts of other types of short-term instruments that bear more risk. And that’s why prime money market funds yield more. They yield more because you’re taking more risk.

And following the financial crisis, the SEC basically said that for prime money market funds, they can put in redemption gates and redemption penalties of up to 2% and gates of up to 10 days in the event of market stress. So I don’t know whether those were invoked this week given everything going on in the market. But if you hold a prime money market fund, you might not be able to get your cash out right away and you might have to pay a 1 or 2% redemption penalty to get it. So our view is like, look, fixed income is all about risk and reward, and there’s this continuum between risk and duration and all these other factors. But don’t be fooled into thinking that a prime money market fund is safe. It may be relatively safe, but it’s not perfectly safe and it’s not perfectly liquid. It’s not as good as a government money market fund. And that in turn is not as good as FDIC insured cash in your own bank accounts.

Meb:

And this becomes speculation at this point. And to me, there’s kind of two parts to this. There is the, is your money safe? Are you protected on this FDIC insurance? And that’s like the old common about bear markets. People were more concerned about the return of their capital rather than return on their capital, right? So are you getting your money? Is it safe, one. Two, is then are you then optimizing it? All things considered equal for free? Why would you not? Okay, but the first one, the interesting part about this past week and there’s talk of contagion and everything else going on, all the VCs losing their mind on Twitter and going kind of hyperbolic. But what do you see to the future of like FDIC insurance? Is it something that you think people, the government is going to take a look at and say, Hmm, we’re going to raise it?

Or do you think they’re going to take a look at it and say, actually what all deposits are covered. We’re just going to come up with some sort of framework to where you can’t invest in crazy stuff. Like there’s a multi bucket system where I say, okay, well these deposits are ironclad, but hey, it’s T-bills, like sorry, or whatever it is. If you’re talking, Biden calls you today, is that Gary, you’re one of the few sensible sober ones out here. What should we be doing here? What do you think? FDIC, infinity? And then what do you think is the most, what’s your suggestion and then what’s kind of the most likely outcome?

Gary:

Well, given our proclivity to print money these days, FDIC Infinity sounds tempting, but I don’t think that’s the right answer. The FDIC insurance limit has grown with inflation over time. I think it started out at $2,500. Right? Pre-financial crisis, it was up to 100,000, during the financial crisis it was raised to 250,000, which is considerably higher than most other geographies in the world. In Europe it’s 100,000. In the UK as an example, FDIC or their equivalent, their deposit insurance scheme, as they call it, is 100,000 pounds, which is more than 100,000 US. But it’s measured at the bank holding company level, not the bank charter level. So most citizens in the UK have a lot less deposit insurance than Americans do. In Canada, it’s 100,000 Canadian, which is, I don’t know exactly what the exchange rate is today, but roughly 75,000 US.

So in the US we already have a very high level of deposit insurance. $250,000 is an awful lot of money for the vast, vast, vast majority of the population. And so increasing it beyond that for retail investors would be really solving for a pretty small portion of the country who already have other solutions at their disposal like opening multiple bank accounts. And if you add unlimited insurance, you might further increase the concentration of the US banking sector, which would be bad for competition. So I don’t think that’s the right answer. But what is interesting is we’ve introduced a moral hazard here. Right? There’s an interesting debate about should the FDIC have actually backstop it or should they have taught people a lesson to say insurance exists for a reason? And there’s a risk of complacency here where people will look at the failure of SVB and they’ll look at the closure of Signature and they’ll say, well, gee, in these two cases, the FDIC stepped in and made everyone whole, at least on the depositor side. Obviously the equity holders wiped out.

And so, gee, all my money’s going to be safe. But you have to think back to the financial crisis and what happened. Right? Bear Stearns was saved, Citi was saved, although at a very high cost to Citi shareholders, but Lehman wasn’t. And so everything that’s happened so far has been retrospective, not prospective. And I don’t think that it’s safe to assume that if your bank fails tomorrow, the FDIC is going to come in and make you a whole as well, because there’s kind of no end to that and it creates significant moral hazard. I think a lot of people work caught off guard, rightfully or wrongfully. Now everyone is aware. There’s really no excuse if you lose money because you were above the FDIC limit tomorrow, like shame on you. I think this has been well enough covered in the press.

I do think some of the steps that the Fed took over the weekend were very clever. So one of the concerns right now, we talked about at the beginning of the program were AFS securities, right? Available For Sale, where I’m holding a two-year treasury that’s fallen in value if I had to sell it today, but it’s worth 100 cents in the dollar if I keep it through to maturity. And so what the Fed did is they said, any banks that are holding these AFS government securities can pledge them and get 100 cents in the dollar in liquidity today. Effectively, they’re kind of creating zero interest rate policy in a sort of limited way.

But that was, I think, a very smart move because it really should quell any fears about solvency or liquidity risk for banks. Because the banks have enough assets to cover these liabilities. It’s just a function of liquidity. So I think that was a really smart move and that seemed like the right and actually a very clever solution and probably better than providing unlimited FDIC insurance coverage. Is it possible they step in and say, for the six months, the next six months, we’re just going to make it unlimited? Yes, but I don’t think that’s the right answer.

Meb:

How much do you think about, or how much should investors be thinking about SIPC too? And I know credit unions have a slightly different characterization too. Is it like, all right, you need to get your bases covered with FDIC, set up this and then worry about these other things, or do they play an equal role? There’s a lot of acronyms, gets confusing.

Gary:

A lot of acronyms. So credit unions are protected by NCUA, which is basically the credit union equivalent of the FDIC. For all intent and purpose, it’s the same thing. So you should feel perfectly safe with your money at a credit union in the same way that you would feel perfectly safe with your money at a bank as long as you’re below the limits. And it’s the same 250 K limit. SIPC coverage is very different. And a lot of fintechs have sort of hid behind SIPC coverage to imply that your money is safe. But it’s a very different thing. SIPC coverage is designed to prevent against co-mingling and theft and fraud. It’s not designed to protect against solvency. And it’s not designed, it provide any insurance on the underlying securities. Right?

It’s like if I buy 1,000 shares of Intel and those go to zero, SIPC coverage doesn’t protect me at all. Where I’m protected is if my broker takes those 1,000 shares and takes them out of my account, puts them in the brokerages zone account, speculates loses money on the brokerage firm goes out of business. That’s what SIPC coverage protects you against, and there’s a supplement of 250 K for cash as part of that. So you’ll see a lot of investing apps say, oh, we’re SIPC insured, and they’re holding that out as if that’s some great assurance around their strategy. It’s not, it just says that if they commingle your funds and they go belly up, your securities still belong to you. And it’s kind of like, it’s similar to what we were saying about bank accounts. There’s a value to holding that security directly rather than having it commingled. But yeah, that’s basically the distinction.

Meb:

Man, this area to me is fascinating because it’s like the plumbing of these kind of things you really have to get. We’ve kind of been talking a lot about some of these ideas the past few years and feel like it’s still, for whatever reason, very underappreciated. Max My Interest is a great phrase. We may have to come up with some better marketing angles for the broad community because you get lost in the FDIC, SIPC, all this stuff, but we need a lot of this to be a little easier for, I feel like the broad populace to digest. So you guys are doing a good job. Anything we haven’t covered? I feel like we’ve turned over a lot of rocks. Is there anything specific that you think is, you’re like, Oh wait, we didn’t talk about this.

Gary:

No, I mean your questions are always very comprehensive. And I think the interesting, where do we go from here is making sure that you think critically about everything you do in life. I mean, a number of people have said to me, why don’t I just pick one bank? Why don’t I just pick one online bank, it’ll yield enough. And the closest analogy I can think of, albeit imperfect, is think of your main primary bank as your car dealership. That’s where you bought your car. You trust them. Hopefully you trust them. That’s where you go for maintenance. They serve all the mean needs, but on an ongoing basis, you need gas for your car. Do you pick one gas station and say, that’s the gas station I’m going to go to forevermore, or do you shop around a little bit and see what has the best price for gas each week? That’s something you need on an ongoing basis.

We think about your savings accounts is kind of similar, right? You’ve got your relationship bank, your dealership, that’s the home of your relationship with money. But the savings accounts are repriced every day, every week, every month. It kind of pays to shop around. And imagine if there was a service that went around and would refuel your car for you at whichever gas station had the best pricing. That’s basically what Max My Interest does. A little more. We do more than that. People are already doing this in other parts of their life. They’re already being thoughtful about where they buy gas for their car. They’re already being thoughtful about where they shop for food. You just need to think of your financial life in the same way. And the big takeaway from me from the last 10 years of being focused on something that’s much more retail is that the vast majority of the population walks the earth blissfully unaware of financial concepts.

I imagine that most other people when they go out to dinner, they’re like, oh, food is delicious. The atmosphere is lovely. I walk into a restaurant, now I do this with my son. It’s a little nerdy. And we instantly start dissecting the unit economics of the restaurant and trying to understand what’s the rent and how many staff are here. And maybe that’s a personality flaw, but it’s just like how I’m wired. It’s how I think. And maybe, I don’t know, maybe I should just walk in and enjoy my meal, but I’m curious about how the world works. And that’s sort of the fun thing here, is like how does the banking system work? How do funds transfers work? How do the securities industry work? And when you start to dig and think critically, sometimes you uncover something that’s interesting and we hope that we’re helping a lot of people by just helping them be a little bit more thoughtful. And then I’m sure other people will be inspired by this and start to think critically about other aspects of our economy and what else could be done better.

Meb:

I spend a lot of time thinking about when I go to a restaurant, there’s like a bunch of psychology and marketing on how they position the text, where the prices are. If it’s in a row, a lot of the ones traditionally have it be more like center justified. So the prices are harder to compare. There’s all these little things that they can do to optimize the menus. That part of the world’s fascinating to me because it just tricks your brain into making some decisions and ordering the chicken piccata when you really don’t want it. What’s the future for you guys look like? We asked this last time, and I don’t think either of us would’ve predicted necessarily that we’d be sitting at a 5% Fed funds rate world only a year or two later than our last conversation. Is it more just kind of blocking and tackling for you guys, getting the word out, trying to help people be safe and high yielding, but you got anything under the covers that you can let us know about in the future?

Gary:

Yeah, I mean, we’ve got a really interesting product roadmap, but all of it is centered around the same thing. So we’re not adding a robo-advisor not going to cross sell credit cards. We focused on one thing and one thing only and doing it as best we can, which is cash management. But there’s a lot more we can do to help people do even better. So stay tuned on that front.

Meb:

Sweet. Well, you’ll have to come back on. We’ll invite you to give us the reveal when you’re ready. Gary, this is fun. Thanks for being a voice of reason and helping so many people. I mean, I imagine flow through, you guys probably have hundreds of thousands if not millions of end investors. Is that safe to say?

Gary:

It’s been really busy and it’s growing all the time. And again, but we feel like we’re still just the tip of the iceberg. The top 4% of the US population, that’s basically any household with a million or more of investible assets, those 4% of the US households are sitting on $4.5 trillion in cash. So it’s just a truly massive market and we think we’ve built the best approach, so we just want to help as many people as possible. But the fun thing about it is as we grow bigger, we attract more banks. As we attract more banks, the rates get even better and the rate advantage gets even better and that in turn attracts more customers and advisors. So there’s a real virtuous cycle here and it’s been exciting to watch that. And if you check out that alpha study on our website, you can see that since inception we were delivering 18 BPS of alpha. Last year we delivered, I don’t know, 50 or 70 basis points of alpha. Today we’re delivering 127 basis points of alpha, which is a lot. It’s a lot more than we ever thought. So it’s getting exciting.

Meb:

Well, I’m excited for you guys. Best place to go sign up for a new count, learn a little more. Where do they go?

Gary:

Maxmyinterest.com

Meb:

And apathy.com will redirect very shortly. Gary, thanks so much for joining us today.

Gary:

Great, thanks mean. Pleasure to be on the show.

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 feedback at the mebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.