Launch HN: Financial Choice (YC S21) – Checking accounts with market returns
Our background is in computer science (we’re ex-Googlers), but we also love modern portfolio theory, and long-term investment in low-cost, broadly diversified index funds (we’re big Bogleheads fans). Annoyed by our checking account’s low returns, we asked ourselves if there was a way to invest our checking account balances, but still keep the checking account features.
Financial Choice (FC) is our answer. When a user deposits money with FC, like a paycheck, FC automatically invests that money according to our user’s investment preference. When a user withdraws money, e.g. for rent/mortgage or at the ATM, they get money instantly, while FC automatically triggers a sale of their investments to cover the withdrawal. In many cases, investments sell in time to directly cover the withdrawal, while other times, the withdrawal is made on margin until the investments’ sale completes.
Users choose what they want to invest in based on what risk they are comfortable with. Many invest in stock index funds (e.g. S&P500 with 10.3% average annual return, -43.1% worst year [1]). Some users invest in bond index funds (e.g. 6.1% average annual return, -8.1% worst year [1]). Some choose socially responsible investments. Those with the lowest risk tolerance invest in US treasuries.
On a macroeconomic scale, we believe that our approach can solve major problems of the current banking system. Today, banks invest customers' deposits and keep the returns mostly for themselves (the national average interest rate is just 0.03% [2]). When there are losses, FDIC guarantees that customer deposits never lose money, but when the losses become significant enough (like they did in 2008 [3]), the taxpayer ends up paying with bailouts. With FC, users invest their money directly, so returns are transparent and there’s no need for bailouts.
Beyond giving people a choice, there’s also a couple other cool features that we’re excited about. Naturally there are funds flowing in and out of a checking account (paycheck, rent, bills, etc), and we can use these to automatically rebalance a portfolio. Similarly, we can optimize our users’ tax burden by being smart about which investments get sold and performing tax-loss harvesting.
Financial Choice is currently free to use and available in the US. We build on top of Fidelity that provides all checking and investing features. Building on top of an existing financial institution has been hugely helpful to get a full-featured product to our customers quickly (but it does mean that users have to share their credentials with us, similar to Plaid).
We’d love for you to try it out (sign up at https://financialchoice.com/signup), and give us feedback. We would also love to hear what you do with your checking account balance, and what you think the major problems with today’s banking system are (and how they can be fixed).
[1] https://investor.vanguard.com/investing/how-to-invest/model-...
[2] https://www.fdic.gov/regulations/resources/rates/historical/...
[3] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...
156 comments
[ 2.9 ms ] story [ 208 ms ] threadIf that amount of money is significant to you and you think you are missing out, you should stay away from the stock market. You are basically on the verge of bankruptcy, especially if you live in a country without proper social security (e.g. the US).
I like the idea if you are saving for something you do not really need, e.g. your second yearly vacation or some vehicle.
Long term, you could imagine that our automation could buy and sell securities that are slightly different, so that you would get the full tax loss harvesting benefits.
If S&P 500 index funds and similarly broadly defined funds from each brokerage house are available and deemed "different enough", it could significantly increase the money moves available before encountering a "required" wash sale.
I'm not familiar with the behind the scenes aspects of it, but it feels like there may be a clever solution out there that could augment some of the liquidity concerns you mentioned if you could batch the transactions together.
E.g. Alice has $1,000, Bob has $1,000, and Charlie has $2,000. They all have a transaction on the same day. Alice and Bob were on $Illiquid_Fund_A, Charlie is in $Illiquid_Fund_B. Alice and Bob trade with Charlie and everyone goes about their day.
For most people (this is not financial advice for any one person) money in checking and savings should have a low rate of return and therefore low volatility because they need or may need that money to actually be there to pay bills or in times of crisis (emergency savings). Once you have these two pools of money, then you should invest in retirement and finally extra taxable investments. Most people should automate the money going into retirement and investments I agree but turning your entire checking account into a volatile/uninsured pool of money I think is the wrong direction.
We've also seen users who needed to keep much larger amounts of money in their account for relatively long periods of time, because they were shopping around for a house or trying to buy a new car.
Having that “emergency fund” be invested in the market means you will have “buy high/sell low” events.
For sure some people can afford this and just like to live dangerously, of course.
https://tolusnotes.com/the-true-cost-of-fdic-stability-broke...
Also banks are investing all of your money in highly illiquid risky assets (aka mortgages) so I don't see how this would ruin the economy or even meaningfully change the risk profile if adopted at a large scale.
Isn't it $250,000 per customer?
It wouldn't be enough to save the bank if there was a run (because of accounts with huge balances), but it'd be enough to save most of the customers that need saving.
"Please don't fulminate."
"When disagreeing, please reply to the argument instead of calling names. 'That is idiotic; 1 + 1 is 2, not 3' can be shortened to '1 + 1 is 2, not 3."
"Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith."
I'm sure you can make your substantive points thoughtfully, so please do that instead.
Deceptive post.
I would love to be able to set a "surplus" threshold as part of this solution, say $5k (just an example - it should be set by the user), such that any amount above that in the account is invested, while the rest is kept in cash. That would solve the "emergency" funds issue for some people.
I think framing this is a checking account is what people are having trouble with. It really seems like an investment account with easy liquidity. If you add a section that is kept in cash, then it's checking + investment with automatic rebalancing.
This is absolutely the case. This isn't a checking account. This is liquidity management for those who are comfortably operating aggressively with their personal finances. With that said, definitely going to give it a spin side by side with my Fidelity Cash Management account.
Also, the fact that not many of them have this feature is kind of a red-flag. But then I am not the expert and I might be absolutely wrong.
I had the same thought at first. But at the end of the day the competitive edge a company like Financial Choice has might simply come down to marketing and UI/UX.
Wealthfront, Betterment, Robinhood, etc are very narrowly targeted at investors (e.g. if I send a link to Wealthfront to my cousin who wants to earn a return on a $5000 checking account she set up for her young child, or even her own checking account, she's very unlikely to convert)
But I also think for others, this is quite a mental shift on how to look at checking and investing accounts. There are some investment companies like Wealthfront and Betterment who are starting to move into checking accounts, but it feels very much like a afterthought to a customer.
We are hoping to truly unite the two account types.
Presumably you have put some thought into how you're going to manage these costs (beyond not providing branches) or what checking account functionality you are uninterested in providing.
Yes exactly. Checking account is the safest thing you can do online especially with FDIC backing. It is misleading to say that it is like a checking account. It is not. People can lose money with this product and I think that needs to be clarified which is the opposite of a Checking Account.
My old investment account offers to watch my checking account and pull any "excess" money into investments. if i drop below a threshold? Sell and move to checking.
(The firm is "betterment" if you want this). Would not recommend for/against. I no longer use this firm.
Fidelity has a Cash Management Account [1] that functions as a checking account as well as hold securities. (It also sweeps into FDIC-insured accounts overnight.) I find it useful for planning large expenses by e.g. buying a Treasury or other bond that matures around when that expense will be due, thereby earning a bit more yield while making the available cash actually represent unencumbered cash.
The UI isn't super modern, though. That may be worth giving up some of the securities features one will never use and the FDIC insurance.
[1] https://www.fidelity.com/cash-management/fidelity-cash-manag...
We can't really help you if we end up losing all of your money... but our page looks way better than the alternative!
They're built on Fidelity. Sweep will come. And there is value in being able to e.g. have an easy interface that says "I want this cash to be liquid around this date with about this confidence" and let the system work for you. Or designate cash as a rainy-day fund, or as buffer cash that can be invested in risky, marginable securities, et cetera.
From your description, it sounds like this is not FDIC insured?
That's correct, because your money is invested, this is not FDIC insured.
We are buying and selling the stock in such a manner that you get instant access to cash (e.g. at the ATM), which would be impossible or very tedious if you did this manually :-)
Would this go through and the customer loses 10% of their account value or will you guys stop such a withdrawal.
You're going to get users who sign up thinking this is just like a bank account, but with better returns. Then the market will drop 10% when their rent is due tomorrow. Bank rates are so low because the money is always there and insured. Anything without these features should not be called a checking account.
You call yourself Bogle fans, but passive index investing and instant cash access are fundamentally opposed from a time perspective. Finally, this is a tax nightmare. People will think they have huge gains in their account but get hit with a capital gains tax when they go to withdraw.
"passive index investing and instant cash access are fundamentally opposed": I agree, this is the case right now, but we want to change that, because there isn't any fundamental reason for this.
Yes, people will owe tax, but remember that only your gains are getting taxed. So if you get a tax bill, it's because you made money. That is still a net-positive. There are also a lot of things you can do to reduce (though not eliminate) the tax burdon, such as carefully selection what investments to sell, predicting money flow (e.g. not investing a paycheck if rent is due a day later), tax loss harvesting, etc.
Sounds like if the market is green I'm paying a hefty free for every single checking transaction
Even this is incomplete, because we don't know the other tax situations, was there a tax loss carryover that would/could be applied, etc, etc, etc.
Taxes are complicated.
They are opposed. Passive investing requires long waiting and holding, not lots of tx like a checking and cash access require.
Margin against the contents might be better, since you can keep the gains and not pay tax.
> e.g. not investing a paycheck if rent is due a day later
Yea, this is the problem! If you use this as a checking account, then you can't NOT invest it.
However, doing that is really hard, and requires you to micromanage your checking account. I personally (before using FC) had $10-20k in my checking account, because 1) I really want to make sure I don't miss a rent payment because I mess and 2) I don't want to micromanage. So, at least in my situation, some of the money is moving in and out and can't really be invested, but a decent chunk (probably >10k) just sits there. I imagine this is true for many people.
I can maybe get past the risk since I invest a lot anyways, and cap gains since interest bearing accounts are also taxed as ordinary income, but if every withdrawal causes a reportable sale, how is this not a IRS paperwork nightmare?
"You can aggregate all short-term and all long-term covered transactions and report them as single-line entries directly on Schedule D. A covered transaction is one where your broker provided a 1099-B Form to the IRS that: 1) Show acquisition date and basis and 2) Don’t require any adjustments or codes"
https://www.hrblock.com/tax-center/income/investments/report...
[1] https://www.multpl.com/shiller-pe
1. Do you think there's an opportunity for you to obtain 3rd-party insurance on deposits, as a sort of middle ground between uninsured deposits and FDIC?
2. How/why did you choose to partner with Fidelity?
3. Have you launched on any other financially-focused websites? If so, how was your product received by those crowds?
4. Out of curiosity, what tech are y'all building with?
Best of luck!
1. It's a good question, I don't think we have really looked into this, so honestly I can say much. But worth of further investigation on our side!
2. It turns out that we need a number of features (investment account, checking account with debit card, etc, ability to spend money against your investments, and a few more), and there are not too many players left that we could build on top of. So it was process of elimination mostly.
3. We haven't, this is our first big public launch.
4. We are built on AWS using lambdas and DynamoDB. We are using Typescript as our main programming language, both in the front-end and backend, which is very convenient, especially since we are using a monorepo. Makes code-sharing very easy. Our frontend is built using React.
Pay X% to limit your maximum losses in a year to Y.
For example, right now you can buy yearlong puts on SPY at a strike price of $260 (58% of the current value) for 1% of the current price.
How are you managing financial numbers safely in TS? Any library to ensure its "safe"?
I ask not to challenge you or critique, but i have a deep interest in fintech and love Typescript. The ability to use it for fintech would be great, i just assumed it'd be too clunky to be practical.
Encourage “reinvestment” of income. The less income the schemer pays out, the longer the scheme will last.
Moderate the amount stolen each year. If he steals a smaller amount each year, the scheme will last longer and he will likely be able to steal more money overall.
Discourage redemptions. Paying out principal to investors at a high rate will crash the scheme quickly. Therefore institute a large penalty for early redemptions or promise an even higher Rate of Return if the principal is reinvested instead of withdrawn.
The Rate of Return promised should be higher than alternatives but not so high that paying out income will quickly bankrupt the scheme.
Recruit new money. New money is key to maintaining a scheme for an extended period
People who want to hold 0% of their assets in dollar?
I often debate with my friend on what percentage of ones assets one should hold in dollars. 0% seems a rather radical choice. I don't know anyone personally who does that.
I am not saying it isn't a rational choice. Only that I don't know anyone who does it.
On the question of how much money you should keep in cash, I think it really depends on how much savings you have. Most experts recommend a rainy day/emergency fund worth 3-6 months of normal expenses. If you invest that rainy day/emergency funds in a Financial Choice account, it is important to choose an investment strategy with an appropriate risk/reward profile, and adjust the savings target to account for the additional risk from the investments. Betterment has a pretty good writeup on this idea https://www.betterment.com/resources/safety-net-funds-why-tr....
* People for whom this product matters ( those who don't have much money and hence should welcome the earning upside no matter how small the interest is, should not use this product because it is an investment account masquerading as a DDA account and could lose value. Having living expenses in an unstable account is just a plain bad financial advice.
* People who have a pile of money want their cash to be cash and cash only. They already have exposure to the market via investment accounts with checks/debit cards against them provided by the likes of Schwab, Fidelity, BOA, Chase and their immediate liquidity needs are addressed via revolving credit lines.
I don’t know why nay-sayers are freaking out about this aside from calling it a checking account. Most HSAs (like Health Equity which I use) have a threshold cash balance (say $500), and then allow you to invest the rest, even in equities. No one seems to yell at them for being irresponsible because a medical emergency may coincide with a market downturn.
Maybe this is inappropriate for a Launch HN, but do you see a path to profitability for this that isn’t based on selling advertising / marketing data? Is there sufficient income or a sufficiently large addressable market here to make this work on just cash management / tax planning?
It’s not just coincidence for a checking account, people often need access to cash during market downturns as unemployment generally increases.
In some sense this is a form of self-insurance rather than paying a “premium” in opportunity cost to the bank each month / year.
Also: I know recommending options to novice investors is considered heresy, but in my experience 1 year puts insuring 50 or even 70% of market value via strike price are often considerably less costly than a 6-8% assumed annual opportunity cost between SPX and some 0/1% saving’s account.
Something that’s automated like this could easily just buy puts with a 1 year window on deposit and paired sell them with equities on withdrawal.
As you know if you read enough about banking, and as the intro points out, banks already invest your balance in risky stuff. Namely they lend it out to small businesses, homeowners, and others at substantial risk for default. There are mitigations like collateral and sometimes securitization, but the risk is real and there and has blown up countless times in the past.
Yes, the stock market can "blow up" too. But at least you're capturing the upside of the risk with this model. Even interest bearing checking accounts share an infinitesimally small fraction of the return the bank can make on your money.
I'm not saying this is for everyone. When I was younger I would routinely deplete my balance and I do not think this is a good setup for people in that position. But at a more advanced age people tend to start carrying significant balances in their checking as a matter of course, and I actually think there is some strong if slightly counterintuitive logic here in this idea.
The comment I replied to above suggested that checking accounts hold risk due to the bank making risky investments, which is fundamentally wrong for everybody operating with in the FDIC coverage limits (which is the overwhelming majority of Americans).
If people were good at sweeping excess balances into their investments I think this idea would be less appealing. But for a variety of reasons, many perfectly rational, people like having a nice cushion in there. It feels safe. Long term, it isn’t. These guys should lean into that in their marketing.
The reason perfectly rational people like having a cushion in their checking account is that rent payments don’t care about 10 year historic trends; they’re just due when they’re due.
I’m sure there’s a decent collection of people here with enough disposal income that the idea of just having all their capital invested sounds lovely. But we’re inside a bubble here.
If this product was billed as “a brokerage with better tools for depositing/withdrawaling money”, the comments here would be radically different.
My deposits are always under the FDIC limit per account so outside the inconvenience, there’s no true risk of loss.
In the other account, based on the same history, I’ll stay well ahead of inflation most years, but lose far more in some.
“There are trade offs for the user” isn’t really in dispute. The major concern being raised throughout the comments here is that advertising FC as a “checking account” is deceptive: it encourages people to think of it like a checking account, despite having a very different set of trade offs.
In engineering, we would similarly talk about violating the principle of least surprise. If my library has a function for saving files that’s very fast but sometimes loses data, I don’t call it super_fast_write, I call it unsafe_write. I think the idea behind this project is super cool, but it’s not high_upside_checking, it’s high_flexibility_brokerage.
But I'm also curious, what other steps could we take to make sure people use this in an appropriate way?
As it stands now, I need to consciously pick a fund, make a transfer, check it, withdraw, etc... But ultimately all I care about is broad definitions of how aggressive my portfolio looks and what I have in what is essentially cash. If you'd just modify all of those transactions into a simple slider for me, the value prop. would be super clear, and I'd also sleep well at night not fretting suddenly having less money than I need.
When the bank screws up and loses 90% of my money, I'm guaranteed by the FDIC to get it all back (as long as it's under the insured amount).
When I screw up, I lose money.
Sure, that's the way investing works, but people generally separate "funds I can afford to invest/lose" from their day-to-day checking accounts.
These days, you can just electronically transfer your money to your broker and it's available "instantly". I am not really seeing an advantage.
Also, I think the point with the bailout is a bit disingenuous on their part. True, if your account is not FDIC insured, then the government wouldn't need to bail YOU out. However, if we experience a similar crisis like we did in 2008, they will bail EVERYONE ELSE out. You just happen to be the sucker who will have paid into it but not been covered. If the argument were for eliminating FDIC insurance altogether, I'd be super onboard.
Why
Not really. They invest primarily in mortgages which they package up and sell to Fannie Mae.
More importantly checking and saving deposits are insured by the FDIC so the risk of loss for the end consumer is zero below $250K (per account!).
Investment accounts would have SPIC insurance against insolvency but the actual risk of market loss is borne entirely by the end consumer. If you’re riding your mortgage payment on whether you don’t lose in any given month, things could get ugly. Ditto for the tax consequences of churning to cover bills.
This is absolutely a painpoint for me and other individuals that prefer to hold as much of their assets as possible in the market. The amount held over in checking for day to day transactions feels like little more than "cash drag" once you have enough saved that you can weather a market downturn. Right now I do expense tracking and budgeting largely so I can figure out how much balance I should keep in my checking account, then transfer the rest to investing. Combining the accounts like you propose would save me substantial time and missed market returns.
A problem you may run into in targeting bogleheads is that they like to see that you're well established before committing their life savings. Putting a substantial amount of money in a non-FDIC insured financial institution without a track record could be a non-starter. Advertising on your landing page that you base your services on top of Fidelity might lower that perception of risk.
I'd prefer my checking account to have 0% returns to -6%.
It is simple for me to set up automatic deposits from my checking account to my brokerage account, and also include automated investment of those funds.
Perhaps I'm old fashioned, but I'm not really seeing the value prop. I have an investment account separate from my checking for a reason. Many reasons, actually.
and to close, referring to your interest in portfolio theory, there is an option value to holding cash. Not saying it should be a major portfolio allocation, but having a certain amount in cash makes sense from a financial engineering perspective.
Since 2016; I have more or less keep all of my cash, minus a small emergency fund, invested into equities at all times.
I have nearly twice as much wealth as I would otherwise have, if I didn't do this and kept cash.
I'm not worried whatsoever on what analysts predict. They are consistently as wrong as they are right, and I've been hearing calls for overvaluations and market crashes for years and years ever since 2013.
You can't time the market.
Yes, you can. Every single one of my investment accounts comes with a debit card that can access both uninvested cash and take a loan against the value of my securities, which I can either repay by selling the securities or by transferring cash.
Hypothetically let’s say everyone was using this already. Then something like Covid or another “worldwide bad event” occurs.
So people spend their money, which in this case means they’re liquidating their investments. This further drives down the price and increases volatility - in other words the people who need the money most in the most desperate times will lose the most as they will need to spend the largest percentage of their holdings.
To add insult to injury if enough liquidated then you could be in the bank run territory since there’s no FDIC insurance you could lose everything.
One quick piece of feedback around the setup process (specifically "pick an investment strategy"). It would be great to see what the 1y & 5y ROI looks like for each of the ETFs you've listed. I'm currently going from your page to google to search for each symbol individually to gauge the ROI. It's taking a while!
Edit: Did not realize I would need to open a Fidelity account to make this work :(
If so, how do you decide what securities to liquidate?
If not, what’s the margin rates and is there a spread atop Fidelity’s rack rates?
I’m in the skeptical camp as well as none of this seems that’s useful vs the potential fee structure and risk profile. Anybody that wants this now can setup a checking account alongside their brokerage and manually sweep cash as needed. That also has the advantage of being in explicit control of what monies get moved.
Yes, cash debits and checks lead to an automatic sales of securities.
You can configure the liquidation, e.g. to the Tax Efficient strategy, which minimizes capital gains taxes by selling shares with the lowest returns first.
We sometimes can't sell quickly enough, e.g. when you withdraw money at the ATM on the weekend, and then you would be paying for a margin loan until we sell your securities (usually the next trading day). It's just Fidelity's normal margin rate, we don't add any spread on top of that.
Manually moving money around is possible but it has some drawbacks. 1) Even with the best manual management, you do need to keep some buffer of money for unexpected withdrawals, and that money earns you essentially zero returns. 2) Fine grained manual management is pretty tedious.