By Paul H. Krumenacker
Many people are resolving to keep their records in better shape this year so that the next tax filing season will go smoother but, as investment options increase in number and complexity, the task of managing your financial affairs is not that easy. Tracking income earned from checking accounts, savings accounts, brokerage accounts, money market accounts and mutual funds can be time consuming.
One way to simultaneously save time tracking your financial affairs and to make your money work harder is to take advantage of a valuable financial vehicle: the central asset account.
The central asset account combines, among other things, checking, savings, credit lines and brokerage services into one account. This account saves you time because each month you receive one statement listing all transactions made during the month, including checks written, cash withdrawals from ATMs, as well as the purchase and sale of securities. At year end, you’ll receive a statement which summarizes all the transactions made during the year and shows all interest income earned through your account. For that year, that statement can be a valuable tool during tax-filing time.
A central asset account is a time-saving device, but perhaps the best feature about the account is its ability to make your money work harder for you. This is achieved by “sweeping” idle assets into interest-bearing money market funds. Most central asset accounts give you a choice of money market, government or tax-free money funds.
With most major brokerage firms and many banks offering central asset accounts, how do you choose the best one for your needs? When comparing these accounts, there are a number of features to which you should pay close attention.
If you have your account at a brokerage house, you’ll be able to take advantage of investment services that may not be available at banks. For example, brokerage central asset accounts may be set up in margin accounts, allowing customers to borrow money against the value of the securities in their account to purchase additional securities at low interest rates. The interest rate will typically be 3/4 to 2 1/4 points above the firm’s base loan rate, which is related to the rate banks charge brokerage firms. As of July 1998, this rate was 7.875 percent at several brokerage firms. In addition, you will also have access to the services of an investment executive who can keep you abreast of new investment opportunities.
Most accounts include free check writing privileges, with no limit on the size of check that you write. Some accounts will automatically return canceled checks to you, thereby giving you a more definitive record of your transactions. Other accounts may list your checking transactions on your statement, but do not return checks. Also, find out if there are any per-check fees or a limit on the number of checks you can write.
Another important consideration is the quality of the idle cash reinvestment option, known as the “sweep.” Some accounts sweep your idle cash balance into money market funds more frequently than others and set the frequency according to lower minimums. These criteria determine how much of your money is put back to work for you, and how soon, thereby enhancing the value of compounding returns. Ideally, idle funds should be swept on a daily basis. Additionally, find out if you get a choice of money market funds. Many accounts will let you choose between a taxable money market fund, a federally tax-free money market fund and a state-specific tax-free fund.
Also check to see if a credit, debit or charge card is offered with the account and if the card is optional or mandatory. Your payment terms may vary depending upon which type of card you use.
While the number of central asset accounts is increasing, so are the types of services that are offered. Some firms now offer services such as special retirement or corporate accounts, automatic bill paying, automatic payroll deduction for deposits, direct deposit of social security checks, cash access through national networks of automated teller machines and traveler’s checks.
Perhaps the most convenient and technologically advanced service to be offered is the automatic voice response system, which is a toll-free telephone number that offers you a menu of valuable information at your fingertips. Imagine being able to find out, among other things, the value of securities in your portfolio, the current money fund rate and which checks have cleared through your account seven days a week, day or night, with just one simple toll-free phone call.
Of course, you don’t get something for nothing, but central asset account fees are surprisingly low, typically ranging between $50 and $150 per year. Central asset accounts generally require initial investments from $5000 to $25,000 (in any combination of cash and securities) and the maintenance of fairly high balances.
Whatever your particular needs are, a central asset account is a convenient way to have your brokerage, savings and checking accounts work together to help maximize your return on assets and minimize your paperwork.
Paul H. Krumenacker is an investment executive at Paine Webber in Newtown, PA.