August 16, 2017
Cash flow is the life's blood of a business, and bank accounts are essential to managing cash flow. If you are starting a business, a key detail to take care of is setting up the right kind of business bank account. Making this effort up front could save you a great deal of time and aggravation in the long run.
How to open a business bank account
The following sections explain the steps involved in finding and opening a business bank account:
1. Separate business from personal accounts
You may be starting out as a small, one-person operation, so why bother with a business bank account? Well, if you are serious about your business, from day one you have to think of it as a different entity from yourself. After all, businesses and individuals have different needs, habits, and legal status.
Separating business from personal accounts will help you track the receipts and expenditures of your business more clearly. Also, since your personal tax status and that of your business may be different, it is much cleaner to keep things like interest and expenses separate. Finally, if the business were to go belly up, again, you would want a clear dividing line between your business and individual assets and liabilities.
2. Evaluate your needs
Before you set out to choose a bank, evaluate your needs. If you are primarily looking for an account to process payments, cheap and efficient checking and wire transfers may be your biggest focus. If you expect to accumulate significant amounts of capital, you might want to focus on the savings account rates banks offer.
Ordinarily, online banks are the best place to look for both cheap checking and better savings account rates, but be advised that there are procedural complications with opening a business account online and limitations on what kinds of businesses can do so. A good approach might be to open an online account with a bank that also has a physical presence in your community. More and more banks are offering a choice between online and branch-based accounts, and opening an account in person while doing your banking online might enable your business to benefit from the rate and pricing advantages of online banking.
Another consideration is whether you expect to seek a business loan in the future. In that case, you might start to cultivate a relationship with a lending bank by opening your other accounts there. If you are interested in business loans, community banks are a good place to look. According to The Economist, while community banks make just 16 percent of loans overall, they account for 43 percent of small business lending.
3. Shop around
Once you have a feel for what your needs are, you can start shopping around to find the right bank. Depending on those needs, there are a variety of metrics you can use to identify the best banks for business accounts.
Two obvious points of comparison are (a) interest rates on deposits and (b) fees for checking and other services. There may be a trade-off between the two, as a bank with attractive deposit rates might also charge pricey fees. Evaluating that trade-off may involve doing a simulation of your balances and banking activity, so you can see which combination of rates and fees would produce the most favorable result for your business.
Depending on the nature of your business, you could also consider putting different types of accounts at different banks so as to take advantage of high deposit rates at one and free checking at another, for example. However, this may not be practical if your business demands that money be able to flow freely between accounts. Plus, a bigger relationship may give you more leverage to negotiate terms with the bank.
As important as interest rates and fees are, there are other factors which might also be relevant to your evaluation of business banking accounts. Processing times, for example, might be critical. How quickly a bank can make funds available and process payments may be central to how fluidly you can manage cash flow. Also, the extent to which you may need a line of credit or other lending relationship may influence where you put your deposit accounts.
4. Get formal
Once you have decided on a bank, there will be some formalities involved in opening the account or accounts you need. Every bank has its own requirements, and it will also depend on what type of business entity you have, such as a corporation or a partnership.
In any case, assemble the formal legal documents detailing the legal status of the company plus its management and authorized personnel. Having copies of these documents ready will help the process go more smoothly. You will also need to provide the entity's tax ID number.
As the account is set up, make sure the bank puts the formal legal name of your business on the accounts and any documents such as statements and checks. Even if you use a more informal name in day-to-day business, using the formal legal name for banking purposes will help make sure payments are properly credited when the bank is interacting with other financial entities such as credit card processors.
5. Manage access
A crucial decision you will face is who has access to the account. Obviously, access should be restricted, and account numbers and passwords should be carefully protected. With that said, though, you may find it necessary to allow someone in addition to yourself access to the accounts so that management of company finances does not grind to a halt whenever you are not around.
Anyone you choose to have access should be a trusted employee, and it never hurts to do a background and credit check on anyone who is going to have financial access. It also might help to use a more restricted account for accumulated profits, to limit your exposure to internal fraud.
6. Put monitoring procedures in place
A final step in opening a business bank account is to put monitoring procedures in place. This is both for security purposes and to make sure you are making cash management decisions based on fully up-to-date information.
Monitoring involves reconciling between bank records and internal records, each of which may have information that has not yet been reflected on the other. It can also be helpful to have someone who doesn't have the authority to direct bank transactions involved in the monitoring process to serve as an objective check.
All this care up front will help your cash flow run smoothly - and that may be essential to the survival of your business.
July 7, 2017
A key 21st-century financial trend has been the union of banks and brokerage firms via merger. So far, not all of these mergers have been completely successful, but banks and brokers keep trying. Beyond what it means for the firms involved, a key question is whether this trend is good for consumers.
It is likely that mergers between banks and brokers will continue, even as the growing prominence of online stock brokers and online banks changes the nature of these mergers. A well-informed consumer should understand some of the reasons behind these mergers, and how the potential benefits and drawbacks for customers.
Banks and brokers: marriages of convenience?
Chase and JP Morgan. Bank of America and Merrill Lynch. More recently, Ally Bank and Tradeking.
Some high-profile banks and brokers have walked down the aisle together since the start of this century. Why are these institutions pursuing these unions so ardently? There are several business reasons that make these mergers appear to be marriages of convenience, though in some cases they might be thought of as marriages of inconvenience as banks and brokers turn to each other to solve fundamental business problems.
Here are some of the reasons banks and brokers are getting together:
1. Low interest rates have made deposits less sexy
With average savings account rates mired at 0.06 percent, traditional deposit banks don't exactly have the most enticing come-on with which to lure new customers. Adding a range of brokerage products can add a little spice to their product line-ups.
2. Online stock brokers have turned many functions into a commodity
The availability of information and services online means that price often matters more than relationships. Being able to tap into a bank's customer base can give an affiliated brokerage firm a marketing channel that does not rely on a traditional broker-driven sales.
3. Cost pressures have both banks and brokers looking for a partner to share expenses
Regulatory and economic conditions have squeezed profit margins for both industries, so mergers can ease the pressure if they are cost-efficient.
4. The right partner can make an old bank feel young again
Many traditional banks in particular have been somewhat slow to embrace technology. A union with a more tech-savvy broker can be seen as a quick way to get up to date.
5. Data mining can bring out the best in both partners
Historically, a problem with mergers has been that entrenched habits and fiefdoms have made it hard to integrate product lines across each partner's customer base. Better use of data to identify and pursue likely matches between customers and products can automate a process that used to be slowed by internal politics and inertia.
The marriage of brokerages and banks goes online
The acquisition of brokerage firm TradeKing by Ally Bank represents a new wave of bank-broker marriages in that these are two online institutions. As such, they don't have some of the baggage that traditional banks and brokers have brought to their relationships.
It is possible that the online model might represent the most positive form of combination for banks and brokerage firms. It is not trying to solve the cost problems of a branch network or a team of stockbrokers, though it can enhance the cost efficiency that online financial institutions already bring to the competitive landscape.
In fact, a merger between an online broker and an online bank might help address the distribution disadvantage that these institutions have. They rely primarily on advertising to attract new customers, unlike traditional banks and brokers which have offices and representatives in multiple locations.
Being able to cross-sell more products once customers are signed up - i.e., offering brokerage services to banking customers and vice versa - gives these firms a way to add new revenues without paying for more advertising. It can also prevent them from losing business to firms that are able to provide a broader range of products.
Happily ever after for consumers?
When wedding bells chime for a bank and a brokerage firm, should consumers be raising a toast to the union? Should customers whose banks and brokerage firms remain single be applauding their independence or wishing they would find a partner with whom they could offer a more complete customer experience?
The answer depends both on what benefits the combined entity offers, and on how you use bank and brokerage services. Here are some issues you should think about:
1. Do bundled services provide best-in-class offerings for your needs?
There is no need to accept an affiliated product if it is inferior. Make sure both banking and brokerage offerings are competitive before you decide to put all your business in one place.
2. Are you benefiting from cost efficiency, or paying for a bad marriage?
Best case, a merger can make you eligible for discounts as the combined entity values its broader relationship with you. Worst case, one way the new management may try to make the economics of the merger work is by hiking fees across the board.
3. Can you keep the distinction between insured and uninsured products clear?
A crucial distinction between a bank and a broker is the FDIC insurance on bank deposit accounts. The brokerage side of the business may offer seemingly similar savings vehicles, but understand that just because they are affiliated with a bank does not mean FDIC insurance extends to them.
4. Are your savings deposits being led astray?
Given the low bank rate environment, savers are desperate for better income sources. If your bank starts introducing brokerage products, you may see some income vehicles with higher yields, but keep in mind that these are likely to be fundamentally more risky than deposit accounts. Besides lacking FDIC insurance, that income may come from more uncertain sources such as mortgages, corporate bonds, or derivatives, or foreign securities.
Have you ever gone through one of those phases of your life where it seemed like everyone was getting married? Mergers between banks and brokerage firms are often so high profile that it may seem like they are becoming the norm as well, but the fact is the sheer number of banks and brokerage firms means that consumers have plenty of choices, both independent and affiliated.
Where you take your banking and brokerage business depends on who offers you the best deals and service. Under some circumstances this may turn out to be a combined entity, but that won't always be the case. You do not have to bank and trade with the same firm, even if they offer a combination of services. Banks and brokers may be getting married, but your accounts remain free to play the field.
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June 20, 2017
Robo advisors are the next big thing to help manage your retirement accounts. But that doesn't mean that you should rely completely on automated investment programs to help grow your retirement funds.
Financial advisors recommend that consumers who want to experiment with self-directing their own retirement accounts considering working with robo advisors for routine trades of low-fee funds.
But advisors say, too, that these consumers should also meet with human financial advisors to review their retirement accounts on a regular basis to make sure that their robo advisors have them on track to meet their financial goals.
It's this combination of automated online brokers and human financial advisors that often provides the best financial results for some investors, say financial advisors.
"I believe that online brokers can be a good option for people who are very in-tune with their finances," says Tony Gentile, a former financial advisor with Elite Wealth Advisors in Sarasota, Florida and now with Largo Real Estate Advisors. "However, and this is a big 'however,' I still encourage those who consider managing their retirement accounts themselves and online to arrange a quarterly meeting with a trusted financial advisor. Having an objective party offer suggestions can help you avoid any potential pitfalls that you might not see coming down the road."
How robo advisor investment programs work
Robo advisors have become popular because they are relatively inexpensive. Most companies offering this service charge fees of 0.15 percent to 0.35 percent of their clients' assets. These clients fill out questionnaires about their financial goals. The robo advisors then invest their clients' funds in certain assets depending on these answers.
Usually, robo advisors invest in low-fee exchange-traded funds, better known as ETFs. Brent Dickerson, owner and certified financial planner with with Trinity Wealth Management in Lubbock, Texas, says that the benefit of investing with a robo advisor is that consumers can invest their retirement funds cheaply and end up with a diversified portfolio.
Cons to using robo advisors to make investment decisions
The downside? Robo advisors are not human beings. And human beings are generally better at helping consumers tweak their savings and investment activities so that they have a better chance of actually living a comfortable retirement, Dickerson said.
"The downside is that it is simply an algorithm processing bits of data," Dickerson says. "You can't ask it questions. You can't customize or personalize it. And it doesn't care what your goals are. Robo advisors simply invest your money at a cost-effective rate."
Elle Kaplan, CEO of New York's LexION Capital Management, agreed, saying that while robo advisors can help provide general guidance for consumers, they can't account for all the complexities that saving for a comfortable retirement can entail.
"A successful retirement involves living comfortably for 20-plus years without any additional income," Kaplan says. "It's not enough to merely start saving. To pull off retirement, you'll need a unique road map and plan that adjusts to your changing goals and needs. This isn't something you'll find from an online broker."
Which investors are a good fit for robo advisors?
Keith Fenstad, a certified financial planner and one of the owners of Tanglewood Wealth Management in Houston, says that a robo advisor can add value to the investor who doesn't know how to begin an investment program and doesn't have the funds available to hire a financial advisor to serve as a guide.
It's better for such individuals to work with a robo advisor than it is for these consumers to do nothing to save for retirement, Fenstad said.
But a robo advisor should not be considered a long-term replacement for working with a trusted financial advisor over a long period of time, Fenstad said.
"When you work with someone face-to-face, it helps instill that discipline in you to stay the course and see the big picture," Fenstad says. "Many times, people will make trades based on emotions. The market might be going through a bear market or a decline."
Fernstand elaborated on what happens when they see the value of their investments decline.
"That weighs on them and they decide to throw in the towel and sell it all. They then completely miss the recovery. If you're working with a financial advisor on a long-term plan, you're less likely to make those emotional decisions that don't fit in a long-term plan."
How to find the right robo advisor for your investments and retirement
Finding the right online broker is not unlike searching for any financial advisor. Dickerson said that it's important to work with an online broker that can trade the products you want cheaply and effectively. You also want to review the fees that this broker will charge in writing so that there aren't any unpleasant surprises.
David Lyon, CEO of Chicago-based Oranj -- a digital practice-management solution for traditional advisors -- said that consumers need to look at their own financial needs to determine whether a robo advisor, traditional financial advisor or a combination of the two makes sense for them.
Some investors are savvy enough to not need advice on creating a financial plan or making smart money decisions. These investors might only need help managing their investment accounts, something that a robo advisor might be able to do for them.
Other investors, though, might need a more comprehensive approach to financial planning. They might need a human financial advisor who can help them create a workable household budget, set up a plan for retirement savings and help them set aside the right amount of money to help fund their children's college educations.
For these investors, meeting regularly with a trusted financial advisor might be the right choice, Lyon said.
"One of the biggest pitfalls of working with a robo advisor is that the personal relationship might be absent from the process," Lyon says. "Financial decisions are emotional. Working either with a virtual advisor or someone whom you don't know as intimately might not be the best choice. Working with advisors who don't know you or who don't really understand your financial goals can leave some value on the table."
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May 4, 2017
Penny stocks and online brokers come from opposite ends of the trading spectrum. Penny stocks are a fairly old-fashioned concept that are bought and sold in over-the-counter markets, while online brokers represent the latest in trading technology. However, it is possible that the two can be used together effectively.
There will always be considerable pitfalls to trading penny stocks. But, the speed and cost-effectiveness of online trading can counter at least some of those pitfalls.
What are penny stocks?
"Penny stock" is a somewhat dated term. It was originally used to refer to stocks trading for less than $1 - i.e., stocks whose prices were measured in pennies rather than dollars. Eventually, due to inflation, the term came to apply to stocks trading for less than $5.
Not all stocks trading for under $5 are considered penny stocks. The term is generally applied only to stocks that are not listed on national exchanges, but rather trade over-the-counter. This is a fairly manual process of matching up buyers and sellers, and it greatly affects how the stocks trade.
Why are penny stocks considered so risky?
Here are some factors that contribute to the risk of penny stocks:
1. Thin trading means volatility
Because penny stocks are not freely traded but rather are only transacted when a buyer can be matched with a seller, prices can take big swings. If a stock has not traded in a while, the listed prices may not represent actual demand for the stock.
2. Commissions take a bigger bite
Commissions represent a higher percentage of smaller trades, and some brokers charge extra for trading penny stocks.
3. Mind the spread
There is often a big difference between what potential buyers are bidding for penny stocks and what sellers are asking. Your return from a stock can depend greatly on which side of the spread the actual trade price ends up being nearer.
4. Don't buy the hype
Thinly-traded stocks are more easily moved by hype, or even out-and-out fraud. Don't believe stories about how a certain little-followed stock is about to take off. Those stories are spread by people who buy these stocks hoping a little hype will get some suckers to buy at higher prices - and you don't want to be one of those suckers.
5. Under the radar can mean under-regulated
Because these stocks have a lower public profile than bigger companies and do not trade on national exchanges, they are likely to receive less regulatory scrutiny. This means "buyer beware" applies especially to these investments.
6. Avoid the "Q"
If a stock's "ticker" or trading symbol has a Q at the end of it, it means the company has filed for bankruptcy. Most investors should steer well clear of this type of damaged goods.
Who should trade in penny stocks?
Penny stocks are for people who understand the risks. This means recognizing the pitfalls described above, and it also means putting these investments in the right context.
For example, if you choose to speculate in penny stocks because of the potential for large short-term price movements, recognize that speculative investments should play a minor role in your overall portfolio. Penny stock investments should not be confused with the type of mainstream stock holdings that should play a role in a long-term retirement portfolio.
Another example of putting penny stocks in the right context is if you use them to buy overlooked companies that you believe are on the rise or ripe for a turnaround. This means doing fundamental research into these companies so that you understand their products, markets, competition and financial condition. It also means verifying that research through independent sources where possible, rather than just relying on promoters who have a vested interest in the stock.
How can online trading help?
If you choose to trade in penny stocks, online trading might help you do so more effectively for two reasons. One is that online brokers often have relatively cheap commission schedules. As noted previously, commissions can take a serious bite out of penny stock returns, but at least some best online brokers are less expensive than their traditional counterparts.
Also, the speed of online trading can help you execute buy and sell decisions in a timely manner, which is especially important in a market often marked by rapid price changes.
The bottom line is that trading in penny stocks is a highly speculative strategy that is not for the faint of heart. Online trading can help make the process a little more efficient, but it cannot eliminate all the risks associated with penny stocks.
February 22, 2017
Do you have a health savings account? The odds are high that you have no real idea of how it works.
An Alegeus Technologies study found more than 70 percent of consumers who have health savings accounts can't pass a basic proficiency quiz on how these accounts work.
Respondents often believed they'd lose money in their accounts if they didn't spend it each year. Others thought they could only use the accounts to pay for co-payments when they visit a doctor. Both assumptions are incorrect.
"Health savings accounts are one of the best-kept secrets for consumers," says Steve Auerbach, health insurance expert and Alegeus CEO. "There is a lot of potential for people to get better value out of these accounts."
Want to get the maximum benefit out of your health savings account, also known as HSA?
Here are five benefits of a health savings account:
1. It's like a 401(k) plan
You contribute to a health savings account much like you would a 401(k) retirement savings plan. Your employer removes a certain amount of dollars from each of your paychecks and funnels them into your account. In 2017, you can contribute a maximum of $3,400 for the year if you are the holder of an individual health savings account. If you are contributing to an account that is serving your entire family, you can contribute a maximum of $6,750 this year.
Health savings accounts come with a catch-up provision, too: You can contribute $1,000 over the annual limit each year if you are 55 or older.
If your employer doesn't offer this type of account for health care expenses, you can still contribute to one. You'll just have to shop private insurers to find a plan.
2. You'll pay less in premiums (via required high-deductible health insurance)
You can only contribute to an HSA if you have what is known as a high-deductible health-insurance policy. In 2017, this meant that your annual deductible had to be $1,300 for single account holders and $2,600 for account holders who wanted to cover a spouse or entire family.
In such plans, you are responsible for paying the annual deductible before your health insurance kicks in and starts covering the rest of your medical costs. For example, if you have a family, you'd need to spend $2,600 in health care costs during this year before your insurance would kick in to help cover your health care expenses for the rest of the year. You would use the dollars saved in your account to cover your deductible.
Advantage of lower premiums
That doesn't sound good, but there is a big advantage to high-deductible health-insurance policies: They come with lower premiums. During those years when you have lower medical bills, you might pay less than you would with a higher-premium traditional health insurance policy.
Chad Parks, CEO and founder of Ubiquity Retirement + Savings, says consumers shouldn't let the high deductibles scare them away from the combination of a health savings account and high-deductible plan. He has his own account, and says that he spends less than he would with a higher-premium health insurance policy.
"With a traditional plan, I knew for sure that I would spend $1,200 a month in premiums," Parks says. "That is gone every month, and will cover me if I have a medical problem. But only if I use medical services will I get a benefit. With the HSA and high-deductible plan, I would pay a lot less in premiums every year. It turned out I'd pay less with the HSA option. That made signing up for one a no-brainer."
3. The money in a health savings account rolls over
Many consumers worry that if they don't spend all the money in their health savings accounts every year, those dollars will disappear. This is one of the biggest misconceptions that consumers have about these accounts.
"This is not a use-it or lose-it proposition," says Rebecca Palm, chief strategy officer and cofounder of CoPatient. "Other accounts like flexible spending accounts do operate that way. If you don't use your money, you lose it every year. People get nervous that this will happen with an HSA. They shouldn't. That money does roll over."
If you end the year with $700 left in your HSA, that money rolls over and remains in your account.
4. This money can grow and earn interest
The money in your account can grow in other ways, too. First, you'll earn interest on the dollars in your account, which, depending on how large your accounts grow, could result in a nice chunk of change each year.
But many health savings plans also offer consumers the opportunity to invest the funds in their accounts into a number of investment vehicles. This works pretty much the same way that 401(k) plans work: You'll have the option to invest your health savings plan dollars into a number of mutual funds. This gives people with high-deductible insurance plans another way to invest in the stock market.
Of course, there is risk in this. Just like with your 401(k) plan, if your mutual funds perform poorly, you could see the value of your health savings dip.
5. There are triple the tax savings involved
Health savings plans come with some impressive tax benefits. In fact, financial pros say these accounts have a triple-tax advantage. The money you put into a health savings account is not taxed. So, if you deposit $6,000 into an account in a year, that money is no longer considered taxable income, which could save you some decent tax dollars April 18.
The earnings, interest and investment returns your dollars generate while in a health savings account are also tax-free.
Finally, if you withdraw money from your account for qualified medical expenses, you aren't charged taxes, either. And qualified medical expenses include more than you might think. Yes, it includes co-payments and prescription drugs. But you can also withdraw money from your account tax-free to cover dental visits, vision screenings and even over-the-counter medications.
Financial penalties using health savings accounts
If you withdraw money from your health savings plan for non-medical expenses, you will have to pay taxes. You'll also face a penalty of 20 percent if you do this before you reach the age of 65. Once you've hit 65, you'll still have to pay taxes when you withdraw funds from your account for non-medical reasons, but you won't be hit with an additional penalty.
John Inhouse, market executive with the Atlanta office of Merrill Lynch, says he expects more consumers to sign up for health savings accounts as they learn more about the tax and other benefits of these accounts.
"Right now, I think it's just a simple lack of understanding that is keeping more people from signing up for HSAs," Inhouse says. "Employers need to do a better job of educating their employees about these plans. They have to show them that these plans are a great way to put money aside."
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