After the Recent Banking Crisis, What Can You Bank On?
Now would be a good time to take stock of how your nest egg may be exposed in a banking crisis. Here are five things you should know about.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
My Credit Suisse friend phoned me in a panic. His employer stock was tanking, and the money in his deferred compensation plan could be lost if the firm went bankrupt. A banking crisis can lead to a personal financial crisis very quickly. Given the recent turmoil in the banking world, investors should take time and review how their nest egg may be exposed in a banking crisis.
Here are the details on five things you should know:
FDIC Insurance
First and foremost, understand how the FDIC insurance works. FDIC coverage is calculated per depositor, per institution and per ownership category. For example, a husband and wife have separate, individual bank accounts with FDIC insurance on $250,000 of deposits at the same bank. Joint accounts are insured separately, and as a result, they each have FDIC protection on up to $250,000 in a joint account or $500,000 combined for a total of $1 million of FDIC protection at the same bank (the two individual accounts and the joint account).
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For balances above those limits, our clients access a network of thousands of banks and establish certificates of deposit with banks nationwide, each backed by the maximum FDIC insurance, but with one banking relationship. The result is a diversified banking experience that can save the client time and money for opening multiple accounts.
Money Market Funds
Money market mutual funds commonly used in brokerage investment accounts are not FDIC-insured (there is SPIC insurance if the custodian fails, but that does not protect against investment loss). Contrast this to money market deposit accounts (MMDs) offered by banks, which may sound similar but are FDIC-insured. Both try to earn their customers more interest than a checking account, and both invest conservatively.
However, some money market mutual funds can own short-term bank notes. These notes may pay more interest than Treasury bills, but they can also carry more risk. For now, investors who use money market mutual funds may want to stick with funds that invest only in U.S. Treasuries and avoid money market funds that hold bank notes till things calm down.
High-Dividend ETFs and Funds
On the surface, a focus on dividend stocks sounds intriguing. Dividends, after all, make up a large chunk of the S&P 500 index’s return — 32% of the total return for the S&P 500 index since 1926 can be contributed to dividends (source: S&P Global).
However, a focus only on dividend-paying companies may expose you to a greater number of financial companies like banks and insurance companies who are known for their dividends. The Vanguard High-Dividend Yield ETF (VYM) has 21.28% in Financial Services versus roughly 14% for the Vanguard S&P 500 Index Fund (VFIAX).
The lesson here is do your homework: A focus only on dividends may hold more financial stocks than the index.
Structured Products
Structured notes are offered by banks to investors and institutions to capture some upside of an investment index but limit the downside. They have maturity terms like 18 or 36 months. Structured notes are complicated and not suitable for everyone.
A key risk to structured notes is they are based on the claims-paying ability of the issuing bank. If the bank fails, the note fails (only principal-protected notes have FDIC insurance). We call this credit risk.
Investors in structured notes need to know their credit risk. The failure of SVB and Credit Suisse underscores this. I am not for or against structured notes — I use them in some situations — but investors should consider diversifying their issuers to lessen the dependency on any one bank.
Deferred Compensation
Money in a non-qualified deferred compensation (NQDC) plan is subject to the creditors of the employer in the event of bankruptcy. In a deferred compensation plan, employees defer a bonus or portion of their salary today for the promise of payment in the future.
However, deferred compensation plans are not covered by the Employee Retirement Income Security Act (ERISA) rules like in 401(k)s, they do not have the same protections. In the event the employer goes bankrupt, money in a deferred compensation plan can be used to satisfy creditors. For this reason, be careful how much you contribute to non-qualified deferred compensation plans. Employees of banks or other financial institutions should pay even closer attention.
The same goes for managing your employer exposure. Like my Credit Suisse friend, things can happen quickly — the employer stock can drop rapidly, the deferred compensation plan can be at risk, and job security can lead to job insecurity. Proper financial planning before a crisis can help.
Final Thoughts
George Patton once said, “We can prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.”
Let’s not let the lessons of the recent banking crisis go ignored. In my client portfolio reviews, we discuss banking relationships, FDIC limits, money market funds and other banking exposures like structured products, financial stocks and employer deferred compensation, to name a few. We can’t predict, but we can prepare. That much we can bank on.
The author is an independent fee-only Certified Financial Planner. For a complimentary banking and investment review, please email maloi@sfr1.com.
Although money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds. The S&P 500 Index is a market capitalization-weighted Index of 500 widely held stocks often used as a proxy for the US stock market. Investors cannot directly purchase an index. The material is solely for information purposes and is not a solicitation or an offer to buy or sell any security.
Investment advisory and financial planning services are offered through Summit Financial LLC, a SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article.
-
The Cost of Leaving Your Money in a Low-Rate AccountWhy parking your cash in low-yield accounts could be costing you, and smarter alternatives that preserve liquidity while boosting returns.
-
I want to sell our beach house to retire now, but my wife wants to keep it.I want to sell the $610K vacation home and retire now, but my wife envisions a beach retirement in 8 years. We asked financial advisers to weigh in.
-
How to Add a Pet Trust to Your Estate PlanAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to Chance
Adding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
-
I Met With 100-Plus Advisers to Develop This Road Map for Adopting AIFor financial advisers eager to embrace AI but unsure where to start, this road map will help you integrate the right tools and safeguards into your work.
-
The Referral Revolution: How to Grow Your Business With TrustYou can attract ideal clients by focusing on value and leveraging your current relationships to create a referral-based practice.
-
This Is How You Can Land a Job You'll Love"Work How You Are Wired" leads job seekers on a journey of self-discovery that could help them snag the job of their dreams.
-
65 or Older? Cut Your Tax Bill Before the Clock Runs OutThanks to the OBBBA, you may be able to trim your tax bill by as much as $14,000. But you'll need to act soon, as not all of the provisions are permanent.
-
The Key to a Successful Transition When Selling Your Business: Start the Process Sooner Than You Think You Need ToWay before selling your business, you can align tax strategy, estate planning, family priorities and investment decisions to create flexibility.
