The Great Filter
Banks are shockingly uncompetitive against FinTechs in any space the latter have been able to enter. I mentioned this briefly last week and have been thinking about why this is so ever since.
In stock broking, OCBC is 13-18x (yes times!) more expensive than IB for UK. DBS' "Robo advisor" is an actively managed portfolio that doesn’t let you transact for 7 days a quarter while they rebalance. For money transfers, the banks are twice as expensive on average and cover fewer countries.
As a former Banks analyst I have heard and given many explanations for this over the years.
It’s the bureaucracy of large organizations. It’s the regulatory and compliance red tape slowing them down. The short term focus on quarterly earnings. They don't understand tech. The internal politics where a legacy product team does not want to be cannibalized by the intrapreneurs. Why waste effort building internally when you can just acquire it eventually? They don’t need to because the implicit government guarantees and licenses protect them.
I am sure there is a grain of truth in all of these.
You remember those mails from Nigerian Princes promising a large reward if you help them get money out of the country? I used to wonder why they were so badly written.
Wouldn't they get a better response rate if they put just a little effort into making them look more…regal?
In their book "Think Like A Freak", Steve Levitt and Stephen Dubner point out that the bad grammar is intentional. It’s a filter to reduce false positives. They only want people who cannot see through the scammy-ness of the mail. Those are the ones to be most easily parted with their money.
You give up a good response rate for a great conversion rate. Maximize the expected value per customer. Find only the suckers.
Why would you charge 13x for a product that is objectively worse in every way?
I wonder.
Despite this customers continue to be cautious with the disruptors. After the launch of moolahgeeks in Jan this year, I spoke to a sophisticated investor.
I explained to him why using Endowus for investing his CPF-OA funds made sense rather than accepting the 2.5% guaranteed returns.
He didn’t want to invest more than a token amount with Endowus. Not comfortable with a large exposure to FinTechs. He wouldn’t budge even after learning that his funds would be custodied with UOB Kay Hian.
I sympathize with him. Return of capital is more important than return on capital and the Singapore Government did guarantee all bank deposits in 2008.
Still, this means there is a strong case for trying out what the new folks on the block are offering. You are quite likely to have a better experience and maybe even better results. With time, you should get more comfort.
SingPass and myInfo have made signing up for a KYC’d account in Singapore so much easier. I must have opened more than 50 financial accounts over the last year without once leaving my desk or pulling out a pen. There’s really no reason you shouldn’t experiment more.
Of course, more experimentation brings more complexity, which is where this month’s nudge comes in!
The nudge
Set up and use a password manager.
I use Dashlane. 1Password also gets great reviews and BitWarden has the best free tier. Any of these should do the trick.
I recently learned that not everyone uses one. In fact, apparently most people don't.
How do you even cope without one in the age of metaverse?
Why do I need a password manager you ask?
Because then all your passwords look like this: RixSoP77NnRqn!M4#5
You can have different ones for all your accounts
Despite all that, it takes less time to log in to a website than if you track them yourself
You have access to every password on every device and everywhere, even when you travel
Many apps even tell you when your account is compromised and help you secure it again quickly
Using one can make it easier to give access to your family if something happens to you
But isn't it risky to put all your passwords in one place? What if I forget the password to the password manager? What if THEY steal my passwords? What if the app is compromised?
All good questions and slightly out of the scope here. Here's an article that does a decent job of answering many of those. Bottom line - its much much better than the alternative.
Reading through the security pages and FAQs of these apps will also help get comfortable. If you really want to be sure, read through their white papers.
Another tip that I thought everyone knew but apparently not - password doesn't have to be a word, it can be a phrase or a set of words! Click that link - its funny.
Take something simple like "Are you for real?", replace spaces with - or +, i's with 1s and e's with 3, make every first letter capital and suddenly you have the most secure password that’s easy to remember. Use that for the password manager and let the rest look like RixSoP77NnRqn!M4#5.
Now if you'll just give me a minute while I find another password for my vault…
I have been a happy Dashlane user for many years now. It was one of the first app subscriptions that I ever paid for and I can't imagine living without a password manager now. At least not till these guys succeed.
P.S.: As soon as I finished writing this, LastPass, apparently the most popular password manager out there, announced they were hacked.
So far it appears no customer data was compromised, as it should be, since they don’t have access to it. Watching this closely.
Meanwhile, set up and use a password manager.
moolahgeeks in Aug
Travel Cards
My piece on the best travel cards was arguably a little late, coming close to the end of school summer holidays. Use them for the next trip.
These cards can save you a little bit of money (~3%) when you spend in FX, while traveling or online, but they provide a whole lot of convenience. Depending on where you're headed, you can completely avoid a trip to the money changer and skip the worry about managing or running out of cash.
Nearly everyone should have one. I recommend Amaze, while they let you earn rewards on linked credit cards. If more banks put the kibosh on that (DBS already has), then YouTrip or Revolut are great too.
ETFs
Rest of my August was all about ETFs.
Let me first express my deepest sympathies for those of you subject to the US Internal Revenue Service (IRS). The sheer complexity. The confusion. And those rates.
Thoughts and prayers.
The first piece in the series looked at the best Equity ETFs to build a low cost, globally diversified and passive portfolio. I tried to definitively answer the question of which one is better - London listed Irish UCITS or US ETFs - and spoiler alert - came down in favor of the UCITS.
The 30% withholding tax you pay on dividends from US ETFs really piles up the pain when you have a long holding period. Add on the (admittedly very small) risk of a 40% estate tax, should the unthinkable happen, and it wasn't that hard of a call.
Other factors like trading costs, expense ratios, tracking differences, bid-ask spreads etc. weren't meaningfully different between the two options.
There was a lot of pushback from people concerned about the lower liquidity and choice with UCITS. I will dig deeper into the liquidity question one of these days.
For now, let me say that speaking to people familiar with the market microstructure convinced me that it was not as big a deal as raw numbers indicated. I would be a lot more comfortable investing in an ETF that trades only, say $500K a day, than I would be investing in a stock that trades as much (not at all).
Regarding choice, I think its not as much of an issue when you're trying to build a passive portfolio and for the rest, is it really so bad that you couldn't access an ARKK UCITS?
The second piece on Bond ETFs faced both those issues on steroids.
The potential for tax exemption on the distribution of qualified interest income made this a closer call. However, it seems most brokers cannot implement this correctly which means that you must deal with the IRS to claim refunds.
That requires getting familiar with forms like the 1040-NR and comfortable with increased risk of audit and possibly an eventual estate tax.
No surprise then, I again came down on the side of UCITS.
I thought the third piece on precious metals ETF would be less complicated, and I was wrong.
Turns out depending on the structure of the ETF, there are three different tax treatments possible for commodity products.
Thankfully all of those involve capital gains taxes and should not apply to foreigners (Non-Resident Aliens, if you want to be technical). Sadly, the "should" is doing a lot of work in the previous sentence.
UCITS again and this time at least liquidity isn't as much of an issue.
Around the web
Where Money Meets Feelings: Financial Therapy Finds Its Footing: "Practitioners charge from $100 to $800 per session, depending on their fee structure and services. “There is only one other financial therapist in Atlanta, and she has a three-month wait list,” Dr. Williams added."
OpenBB aka Open Bloomberg?: This is nowhere near ready (not even a GUI) and there is no shortage of competitors but interesting none the less. $8.5mm in funding - about what Bloomberg makes every 8hrs. And that was before a 14% hike!
Single Bond ETFs: "These single-bond funds might look very simple, but they could be of tremendous help to many investors. Directly trading bonds has been a pain for investors who might lack the proper knowledge or connection. Since bonds don’t trade on exchanges, investors need to trade through one of the broker-dealers over the counter. That often means less transparency and worse liquidity." I don't know… shouldn't the investors stay away if they lack proper knowledge?
Coinbase's Balance Sheet: "The accounting itself is simple enough. But the implications for exchanges and platforms are far-reaching. No longer can the costs of hacks, security failures, bugs and exploits, rug pulls, scams and frauds be dumped on customers by means of coercive deposit haircuts and token issuance. Exchanges and platforms will have to hold sufficient crypto assets of the right quality to be able to reimburse customers for any and all losses from events like these. And if there is a shortfall, that must be borne by their owners and shareholders, not by their customers." Huge if true?
Sallie Krawcheck: She's not wrong.
UFOs?: "This implies that members of the Senate Intelligence Committee believe (on a unanimous, bipartisan basis) that some UFOs have non-human origins. After all, why would Congress establish and task a powerful new office with investigating non-“man-made” UFOs if such objects did not exist?"
This seriously feels like studying for an exam but in real life 😂 So much info about banks and money stuff kinda makes you think this should be on a finance test or something. Low-key useful tho.