BI > NOVEMBER 2005

Choosing Financial Institutions

Maximize Return While Minimizing Costs

Q. Our club formed this year. We are having difficulties finding a good place to keep our dues until we make a purchase. What do most clubs use as far as money market accounts, checking with interest, etc? What financial institutions are used?

A. The best place for your club to keep its money until it has the opportunity to invest can be a confusing subject. But one thing is clear: Investment clubs can avoid full-service brokers and their relatively high commissions. This is because the club makes its own investment decisions.

Your club will want to maximize the return on its money while minimizing its costs. With this in mind, be prepared to compromise. No single broker can satisfy all the unique needs of an investment club at the lowest costs and highest yield in its industry.

Investment clubs have unique broker needs, including:

• Ability to deposit checks from multiple individuals each month. This eliminates the need for a separate bank account.


• Check-writing capabilities, for the same reason.


• Multiple-password accessibility. This allows all members to view the club's account, but only one (with the designated password) can place securities orders.

Doug Gerlach has a helpful investment club broker list you can view at www.douglasgerlach.com/clubs/brokers/brokers.html. You'll need to double-check any information you see on the table. This is because the online brokerage world is changing quickly as companies merge and compete fiercely for market share. One noteworthy broker missing from the list is MyStockFund, which has a partnership with BetterInvesting.

Most clubs have both a broker account and a bank account. When choosing a bank account, remember to consider the following:

• Fees. These can really add up.

Is there a business account fee?

Is there a fall-below fee?

Unlimited check writing or per-check fee?

Other fees?

• Interest percentage paid.

Find a bank that has minimum fees, even if this means your club will earn a lower interest rate or perhaps no interest. This is because most clubs keep only a small amount in their bank account. As soon as enough money is available to make a stock investment, clubs generally invest it.

The two examples below illustrate the consequences of selecting a bank based on the following assumptions: The club has 10 members who each invest $50 a month. A $7 commission is charged for each transaction by the club's broker. The club likes to keep its commission cost to a maximum of 1 percent, so it invests only when it has at least $700 available. Thus, it typically invests every other month.

Example 1

Two-percent interest is earned on the bank account, and there's a $10 monthly business account fee associated with the account. Interest earned each month is less than $1. When the $10 monthly fee is taken into account, the club actually loses more than $9 each month by keeping its money at this bank, even though the account does pay interest.

Example 2

No interest is earned on the bank account, and there are no fees associated with the account. The club immediately moves money from the bank account to its brokerage account, except for any minimum balance requirement. In this case we'll assume this is $5. The club's broker pays 2-percent interest on cash balances (which the club keeps in its money market account). Inter-est earned each month is less than $1. No bank fees means this club is ahead by about $1 each month, or $12 a year.

This isn't a great deal of money, but as Senator Everett Dirksen once reportedly said, "A billion here, a billion there -- pretty soon it adds up to real money." OK, we're talking about only a few dollars a year in this case, but you get the idea.

A list of banks with their rates listed can be found at www.bankrate.com/nsc/rate/brm_chkselectsearch.asp. Note: These are for personal accounts. Once you find a bank that looks interesting, you can visit its website or talk to a bank representative for commercial banking (small business accounts) and check the specifics of its business account policies.

When this upfront research is complete, your club can relax with the knowledge that it's maximizing the return on its money while minimizing its costs. As with any financial transaction, be sure to read the agreement in detail before your club members add their signatures.

Ask Colleen your club question by writing to colleen@ColleenMulder-Seward.com. Colleen holds an M.B.A. from Wayne State University. Since 2000 she has served on the board of directors for BetterInvesting's Southeastern Michigan Chapter. Colleen also writes the Retirement Intelligence Information Services newsletter for retirementcalc.com.