Have you ever wondered where your money goes after you deposit your savings to a bank or brokerage firm -- before they pay your savings interest rate? I worked at the largest global bank and brokerage firm, so I can tell you.
These places really are a safe place for some of your money -- do not let bad conspiracy theories or great movies fool you. They are required to keep some risk-free reserves in Treasury Bonds and Municipal Bonds. They earn a lot of income holding these individual bonds with your money.
After enough of your money is removed from harm’s way in bonds, then they can take calculated risks with the rest. These investments provide a much bigger yield than the safe bonds, enough to afford a few mistakes along the way.
So, why don’t we just do the exact same thing?
After the banks and brokers collect that yield and profit on your money, you may have noticed it does not all end up in your account…or a portion of it…or even more than a little.
Let’s keep following your money. First, they have a ton of overhead costs to cover, and a lot of people to pay. What ends up making it to their bottom line is still a big number, though.
Their largest obligation still remains, however. Their shareholders need to get paid first -- well before, and much more, than their customers.
If you wonder why your interest rate at the bank or brokerage has remained so low, keep following your money.
My local community bank was purchased by a global bank and brokerage firm that is publicly traded. Their fiduciary duty now is to make money for their shareholders first, not their customers. Compare the direction of your bank or broker’s dividend paid to shareholders to their interest rate paid to customers.