Launch HN: Financial Choice (YC S21) – Checking accounts with market returns

57 pointsby konne88almost 4 years ago

Hi HN, we are Stefan and Konstantin, co-founders of Financial Choice (<a href="https://financialchoice.com" rel="nofollow">https://financialchoice.com</a>). We offer a checking account alternative that lets users invest their balance (not FDIC insured), otherwise it works like a normal checking account.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 <a href="https://financialchoice.com/signup" rel="nofollow">https://financialchoice.com/signup</a>), 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] <a href="https://investor.vanguard.com/investing/how-to-invest/model-portfolio-allocation" rel="nofollow">https://investor.vanguard.com/investing/how-to-invest/model-...</a>[2] <a href="https://www.fdic.gov/regulations/resources/rates/historical/2021-03-29.html" rel="nofollow">https://www.fdic.gov/regulations/resources/rates/historical/...</a>[3] <a href="https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008" rel="nofollow">https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...</a>

35 comments

LamdbaMambaalmost 4 years ago

It's dangerous to call this a checking account alternative. It is not a checking account, it is a taxable investment account.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.

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kohanzalmost 4 years ago

As a counterpoint to the nay-sayers, I personally see value here and would opt for this were it offered to me by my bank, for example. This is not for people who live paycheck to paycheck, of course. However, for people who often have (a sometimes large) surplus in their checking account that they don't have the time/effort to move and invest elsewhere, this would be great.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.

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mellavoraalmost 4 years ago

Some people apply discounted cash flow analysis to current market prices, and conclude that the expected market return is -6% (or worse) under current conditions.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.

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trailrunner46almost 4 years ago

I can see how you came to wanting this but I think it could lead to dangers for many.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.

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md_almost 4 years ago

"Today, banks invest customers' deposits and keep the returns mostly for themselves (the national average interest rate is just 0.03% [2])."Yes, but banks aren't just turning around and investing deposits in the S&P 500. Right now, the marginal reserve requirement in the US is 10%. So the bank is keeping 10% of your deposit as cash.This is pretty similar from the common advice to "keep 3 months' living expenses as an emergency fund." And thinking about that advice, I have to question the value of Financial Choice:* If I'm a user with a reasonably high net worth--say, 10x my 3-month living expenses--I should probably just put the 3-month expenses into an FDIC-insured bank account and put the other 90% of my assets into a low-cost mutual fund or ETF.* If I'm a user without 10x my 3-month living expenses, I definitely shouldn't be investing my emergency fund in speculative assets like equities!So, like, who is this for? :)Edit: Reading some of the other comments here, I get the impression there are some posters here in my first category who would like their 3-month living expenses to also be invested in equities. And yeah, if you are relatively high-net-worth-relative-to-expenses, you can risk it--someone in the "10x" category can suffer a 40% market downturn and still have a meaningful emergency fund.On the flip side, consider that market downturns and the need to tap the emergency fund are not statistically independent; the emergency fund exists, in part, to avoid forcing you to reduce your market position to cover expenses when you lose your job in a downturn!

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mapgrepalmost 4 years ago

I actually think this is a really intriguing idea once you push yourself past the knee jerk reaction of "wait you want me to put my whole checking balance in mutual funds?!"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.

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vineyardmikealmost 4 years ago

> 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.Very rich people have access to borrow against their investments so they don't have to sell (and trigger taxes).I would never use FC as it is. BUT if you made a product where you never sell the underlying assets, and instead offer a 0% loan against them when i withdraw (and take a fee somewhere to cover), I would be very interested. Ideally, it might have protections so i can never get a margin call and be in debt during bad market times. Perhaps i can only borrow against the invested amount (or eg 75% of it), and any asset growth is profit, and not borrowed against.The benefit to this is great. I can watch assets grow, and capture their growth and not deal with taxes, while still benefiting from liquidity. For people will large, regular income (eg. SDEs), you can usually rely on a continued income stream. I am fortunate that i usually invest a large % of my income (sde DINK yay), so being able to only "borrow" against a subset of it for faux-checking seems fine.

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keeganjalmost 4 years ago

This is brilliant.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.

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Bostonianalmost 4 years ago

If you have $3000 rent due, you can keep $3000 in checking to pay that, but you should not put that money in the stock market, since it could be worth only $2700 at the due date. Therefore I think the statement "We offer a checking account alternative that lets users invest their balance (not FDIC insured), otherwise it works just like a normal checking account" invites trouble. People should use checking accounts primarily to pay bills, so risky investments do not belong in them.

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endisneighalmost 4 years ago

This seems pretty terrible IMO.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.

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sonographalmost 4 years ago

Putting the Checking account into a fund/security and then selling the fund/security for ATM withdrawals, or individual expenses etc will be a headache come tax time. How does your product simplify this?From your description, it sounds like this is not FDIC insured?

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calderarrowalmost 4 years ago

Congrats on the launch! Few questions: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!

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codegeekalmost 4 years ago

So this is an investment account ? If you are not FDIC insured, can you guarantee that I will not lose any money at any time ? If not, it is not really a checking account in my opinion. With my brokerage account, I can already sell securities whenever I want and take the cash out (with tax consequences). Aren't you essentially doing the buy/sell for me but everything else applies just like any investment/brokerage account ?

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jesuslopalmost 4 years ago

Shiller PER is at 38.5 [1], signaling overheating. Is it now a wise moment to do an all-in of your savings in an S&P index replica? It is dubious to me. I buy bogleheading in general, but some market timing thinking seems unavoidable to make the choice, specially if one is not young and comes from a zero investment prior.[1] <a href="https://www.multpl.com/shiller-pe" rel="nofollow">https://www.multpl.com/shiller-pe</a>

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TekMolalmost 4 years ago

Who is the target audience?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.

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m4xm4nalmost 4 years ago

I guess I don't quite understand the target audience? I put in my average checking amount and it quoted me at how I'm potentially missing out on $262 dollars/year, at which point, I think, yeah okay, but I have FDIC-insured deposits, so I don't feel too compelled to forgo that for the promise of maybe adding another $262 to my wealth. I'm just simply not keeping 10s of thousands of dollars in my checking account. To me, that's what a savings account and/or investment accounts are for.So who are these people keeping so much money in their savings account that they want to invest it, but are not already being served by other offerings from traditional investment firms of high-yield savings accounts?

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nmhancocalmost 4 years ago

Hey I like this idea, I think the tax management is a nice value add too.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?

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notyourdayalmost 4 years ago

I do not know what is more bonkers - the fact that this is being pitched as "checking accounts" or the fact that YC invested in it.

neil_salmost 4 years ago

As a Googler, I have this pain point. I was envisioning a product that sweeps the leftover income at the end of the month after all credit card bills and rent are paid, into a brokerage account. It would also automatically invest that amount into my choice of ETFs, which Vanguard bizarrely doesn't seem to support today. This seems to achieve the same goal with a simpler implementation, and then as you improve your cash flow predictions, you could start keeping a cash buffer and delaying investments to avoid some cash<>asset conversions.Worrying about capital gains taxes is a head-fake - you're only paying tax on your gains, which would have otherwise been minimal interest, which btw is taxed higher than gains. The risk here is just that the amount of margin interest I pay is dependent on how quickly you're able to sell, although hopefully this shouldn't be a massive issue for VTI et al.Your messaging on the website seems clear to me, I wouldn't worry about anyone living paycheck-to-paycheck mistaking your technical looking homepage for a regular checking account.One of your mentioned use cases doesn't sound right though - if I'm saving up towards a short-term spending goal like a car or house downpayment, I probably want a predictable balance and not exposure to sudden price shocks.

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sarora27almost 4 years ago

This is an awesome idea! Signed up and playing around right now.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 :(

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ram_raralmost 4 years ago

This is a great, we need more of such financial instruments than traditional checking account. But I'm wondering,[1] How do you handle capital gains tax, when the user withdraws the amount from their account?[2] How is this different from marcus/ally and thousand others, that provide money market fund accounts and money there is insured by FDIC.

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aetheranealmost 4 years ago

What about wash sales? That seems like a big threat to this model

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tmortonalmost 4 years ago

Is this the modern equivalent of getting stock tips from shoe-shine boys?

koolbaalmost 4 years ago

Do cash debits and checks lead to automatic sales of securities or does it roll into an automatic margin loan?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.

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jklein11almost 4 years ago

How is this better than what Charles Schwab already offers? With their Investor's Checking account there is no overdraft fee as long as it is covered by another account(can be a brokerage account.) If I overdraft I can the $$ can be pulled from cash in the brokerage account or margin. The checking account is FDIC insured if I do decided to carry a cash balance. The brokerage is SIPC insured(which I am hoping your offering will be)

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steviedotbostonalmost 4 years ago

How does this differ from having a Fidelity debit card tied to an investment account?<a href="https://www.fidelity.com/cash-management/faqs-atm-debit-card" rel="nofollow">https://www.fidelity.com/cash-management/faqs-atm-debit-card</a>"The Fidelity debit card is available on youth accounts and nonretirement brokerage and cash management accounts with individual, joint tenant, and trust registrations"

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cthaehalmost 4 years ago

You mentioned that you can optimize which investments get solds. Assuming my risk tolerance is fine with stock index funds, what happens if I want to withdraw, say 1/2 of my portfolio but the S/P 500 is down 20% (aka March 2020 withdrawal).Would this go through and the customer loses 10% of their account value or will you guys stop such a withdrawal.

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whoknowswhat11almost 4 years ago

Fantastic product.Business accounts have much higher cash drag - much harder / complex market but if you had the full package would be amazing (cash drag can be around $500K easily).For larger uses of money (house purchase etc) how does that work in this system.Also, I'd tag it a brokerage account with excellent cash management features - that's the normal way to call this.

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Galanwealmost 4 years ago

Don't traditional bank already have brokerage accounts? I do personally use interactive brokers, but my bank is HSBC and I know I could have a dedicated brokerage account to buy stocks, ETFs, etc there. How is that different?

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gremlinsincalmost 4 years ago

Curious, what's required to startup in this space? I've had some ideas myself, and have looked at banking as a service platforms, but everything seems complicated.

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sebastian_zalmost 4 years ago

That is an interesting idea. Some related options that the target audience for this service may use are funds like ICSH or crypto interest accounts like BlockFi.

geraldwhenalmost 4 years ago

This is a brokerage account, not a checking account.Deceptive post.

oplavalmost 4 years ago

So is this essentially Fidelity's Cash Management Account with access to riskier investments?

dsg42almost 4 years ago

So you built a financial product to convince people to forgo FDIC insurance on their primary checking account? What an evil premise for a company. That's despicable. I'm sure almost none of your customers will understand their inherent cost of repeatedly moving money in and out of a volatile asset, not to mention that this concept would ruin the economy if widely adopted, because the FDIC was invented for a reason. I hope the SEC destroys you.

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terrib1ealmost 4 years ago

Ponzi Scheme Longevity Rules: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