Transferring my accounts from Schwab to Fidelity; Call with my Schwab rep; A look at Vanguard and Interactive Brokers; A reader disagrees with my characterization of Schwab

1) Today, I'm following up on my saga with Charles Schwab (SCHW)...

As I discussed last week, I discovered that Schwab was "screwing me over" by only paying me 0.5% interest on the substantial cash balances in my accounts – far less than the market rate, which is around 5%!

(If you missed it, I discussed the details across three e-mails on Tuesday, Thursday, and Friday.)

Now, before I go any further...

I'll note for the sake of disclosure that we here at Stansberry Research do not recommend or endorse any brokers, dealers, or investment advisors. We aren't affiliated with any brokerage and don't receive any compensation for mentioning a particular broker.

Today, as I've done in my recent e-mails, I'm sharing my personal experiences. (And in Friday's e-mail, I shared comments from readers about their own experiences with Schwab, Vanguard, and Fidelity.)

Keep in mind that you alone have to make the ultimate decision for which firm to use for brokerage services. That means choosing a brokerage firm that best meets your needs.

So, back to my story...

I initially moved my cash into Schwab's money-market funds. But after I thought about it for a bit, I decided on Saturday to transfer all five of my family's brokerage accounts from Schwab to Fidelity.

I did so for two reasons...

First, if I discover that a person or company is taking advantage of me, as a matter of principle I won't do business with that person or company again.

Second, a Schwab representative told me that if I moved my cash into a money-market account and wanted to buy a stock, I would have to transfer the necessary cash back to my brokerage account. That would entail waiting a day.

But sometimes I want to buy a stock that's moving rapidly and therefore don't want to wait a day.

As such, I had left $100,000 in my brokerage account. However, the miniscule interest rate there would cost me $4,500 each year (the difference between earning 0.5% and 5%)!

2) Within an hour of initiating the transfer, I got a call from my representative at Schwab, who was quite agitated at losing a multimillion-dollar client.

I explained my two reasons for switching...

To the first, he said my cash was now in a money-market fund and earning a competitive interest rate. But I said I felt that Schwab, unlike its largest competitors – Fidelity and Vanguard – was doing the wrong thing by making the default interest rate for its clients' cash a mere 0.5%. As such, I no longer wished to do business with Schwab. As I said:

I'm not mad at you because I know this policy is decided at the board and C-suite level. But please pass my message along to the higher-ups at Schwab.

Regarding the one-day delay in buying stocks, my Schwab representative said I had a margin account so I wouldn't have to wait a day. But I said it was too late – the other service representative had told me otherwise, so I had already initiated the transfer.

3) As I noted last week, the problem of financial institutions paying ultra-low interest rates on customers' cash isn't limited to Schwab. As reader Bill D. wrote:

Schwab isn't the only one.

For historical reasons I have brokerage accounts at Merrill and at Chase. Neither automatically will sweep the cash into a real interest bearing fund. Pathetic.

The banks themselves are also hopeless as the vast majority of accounts don't pay anywhere near market rate.

It's a sad state of affairs that requires a lot of extra work. I am considering moving all my [accounts] to Interactive Brokers, which does pay market interest rates.

4) Not so fast, Bill...

I did a little bit of research on the three other brokerages my readers mentioned most often: Fidelity, Vanguard, and Interactive Brokers (IBKR).

Vanguard looks like it actually has the best deal: all cash is automatically invested in its Federal Money Market Settlement Fund, which is currently yielding 5.27%.

So why did I move my accounts to Fidelity?

Mainly for convenience, as I already have accounts there through a retirement account and employee stock-purchase plan.

And there's not much difference in the interest rate. When you set up an account there, you are required to choose between these two options (I chose the first one to earn 4.95%):

As for Interactive Brokers, at first glance on the company's website, it appears to compare favorably (though note that its list doesn't include Vanguard or Fidelity):

But when I read the fine print, I learned that the account wouldn't pay any interest whatsoever on the first $10,000 of cash. So it's a terrible deal for small accounts or those that don't hold much cash:

If you hold $1 million in cash, the blended interest rate only drops from 4.83% to 4.78% according to Interactive Brokers' website:

But if you're holding that much cash, you can earn 5.3% at Vanguard and elsewhere – which adds up to more than $5,000 per year – so it wouldn't make sense to keep it at Interactive Brokers.

Lastly, you need to have a Pro account to get 4.83%, as the Lite account only pays 3.83%:

So, based on this simple analysis, I would give Vanguard a slight edge over Fidelity, with Interactive Brokers far behind... and Schwab very far behind). (Of course, there are many other factors to consider – again, which some of my readers discussed on Friday.)

5) Many of my readers disagreed with my characterization that Schwab "screwed" me. For example, as John W. wrote:

Your epistle on Schwab was very disappointing to read. You are very smart. YOU screwed up and YOU are to blame. If you want a higher interest rate, by gosh get off you're a** and check into a money market, CD or Treasury.

Charlie Munger would be very disappointed in your Schwab epistle. Like Charlie use to say, "Get over it. Don't feel sorry for yourself or have anger at your own stupidity or for things you can't control in life."

Whitney, you are very good at what you do and teaching. Keep up the good work. But please drop the liberal pity attitude! You are better than this!

John, I knew Munger... and there's no question he would support what I wrote.

One of the big reasons he loved Costco Wholesale (COST) so much that he served on its board is that, unlike nearly every other retailer, it always put its customers' best interests first.

And as I said earlier, when I opened up a Fidelity account to switch from Schwab, the process required me to select one of two options for my cash: a money-market fund yielding 4.95% or an alternative yielding 2.69%.

I didn't even have the option to get a piddly 0.5% on my cash.

That's what a good company does – it looks out for the best interests of its customers instead of trying to exploit their inattention/ignorance.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.