Bank Loyalty Has Long-Term Benefits But Short-Term Costs

Just like job loyalty, bank loyalty often doesn’t pay. I made the mistake of being a loyal employee for eleven years at my previous firm. If I had job-hopped, I probably could have made $1 million more in my career.

During my capital raising process to buy a home with all cash, I’ve had to track a lot of money and move around money to various banks. Ideally, I want to consolidate as much money as possible in a financial institution that pays the highest cash interest rate.

For me, that institution is Fidelity since it is one of my existing finance relationships. Idle cash at Fidelity automatically gets invested in SPAXX, its primary money market fund that pays a monthly dividend that annualizes at ~5%. If you have $100,000 or more, you can invest in FZXX, a money market fund that pays even more.

But guess what? Out of loyalty to my primary bank, Citibank, I was very slow to move my funds. Let me tell you a story why.

Bank Loyalty May Cost You Money

I’ve been a Citibank customer since 2001 when I first moved to San Francisco. I wanted an international bank that had branches across the world. Given I would be constantly traveling to Asia for work, I wanted the security of having a bank almost everywhere I went.

Three years into my career, in 2002, I was held hostage by some bar owners in Beijing who demanded I give them all the cash I had. As I only had about $100 in my wallet, it wasn’t good enough. It was late at night and I had only just just arrived in China three hours earlier.

Curiously, my #1 concern wasn’t about my safety. Yes, it did cross my mind that my captors might chop off a finger with a butcher’s knife if I didn’t pay them more money. Rather, what I was most concerned about was being unable to meet my clients in our hotel lobby at 8 a.m. for our scheduled visit to companies.

If I didn’t show up, it may have been the end to our business relationship. My bonus and my career were in jeopardy. Finger be damned!

After what seemed like an hour of negotiating, I acquiesced and gave my captors my ATM debit card and password. One fella disappeared for about an hour and returned with 14,000 RMB ($2,000) in cash. At 1:30 a.m., they let me go and told me never to return.

Citibank Made Me Whole

Thus was the evening when I discovered I could actually withdraw $2,000 with my ATM card instead of just $200. In retrospect, I laugh at my naïveté for risking my well-being for a mere $200. But I was 26 years old at the time and valued money more back then because I had less of it.

When I got to my hotel, I called the 1-800 number on the back of my ATM card and told the Citibank rep that I had been abducted and robbed. They told me not to worry and that they would open an inquiry.

When I got back to San Francisco ten days later, Citibank told me they had credited my account the full $2,000. It was at that point I promised to bank with Citibank for the rest of my career. I felt grateful and indebted.

Over the years, I got multiple mortgages through Citibank. I opened up a personal line of credit I didn’t need because my personal banker said she would receive a bonus if I did. I also rolled over my 401(k) to Citibank and deposited more than a million dollars over the ensuing decade.

Due to Citibank’s customer service, it likely earned back more than 50X the cost of crediting me $2,000. If you work in banking, the lesson here is to provide excellent customer service! As your customer grows older and wealthier, your bank will organically gain more business.

Loyal To People, Not Firms

After I sold about $750,000 of stocks, Treasury bonds, and municipal bonds from my Citibank brokerage account, I left the proceeds just sitting there for about a month. The Citibank brokerage account paid an insignificant 0.2%, but I was unbothered, partly because I was happy to de-risk.

After selling, the first person I thought about was Jeff, my investment advisor. When you are a Citigold client, Citibank assigns you an investment advisor for free. I wanted to keep my $750,000 in cash with Citibank because I’ve known Jeff for over a decade. Maybe one of the ways he gets paid is by retaining assets and clients.

Over the years, Jeff has suggested helpful solutions to my financial problems. Here’s an example.

Investing In The Stock Market When I Had No Job

When I first retired in 2012, Jeff was the one who kept me updated on new structured note products each month.

Back then, I wanted to invest my entire severance check in the stock market because I felt there was upside. But I was also scared to invest because I no longer had a job. What if the stock market crashed again and I was forced to go back to work? That would be humiliating.

As a solution, Jeff found a 6-year Dow Jones Industrial Average structured note that would pay 110% of the upside performance with no downside. For the downside protection, I would accept only a 0.5% annual dividend compared to ~1.6% at the time. I decided to invest $150,000.

Six years later, the $150,000 invested turned into about $350,000. If Jeff hadn’t suggested the structured note with downside protection, I probably would have invested only $50,000 in the stock market and the rest in a CD. If I had the guts to invest $150,000 naked, I probably would have sold much sooner than six years.

When the note finally came due, I used some of the funds to buy a fixer in Golden Gate Heights, San Francisco. This was fortuitous timing because three years later, Redfin named Golden Gate Heights one of the nation’s top 10 hottest neighborhoods to buy a home.

The 10 hottest neighborhoods for 2H 2017

Move Your Money Around For Maximum Returns

Jeff asked me why I was selling so much and I told him it was because I wanted to upgrade homes. He was genuinely excited for me, even though he knew those funds would eventually disappear. I heard zero pleading from Jeff to keep the funds at Citibank or to get me to talk to a mortgage officer to borrow money instead.

As I mentioned in a previous article, I had a difficult time selling municipal bonds through Citibank because the bank couldn’t access liquidity in the market. Jeff handled several sales but failed to sell a couple of chunky municipal bond positions as there was no demand. He tried for several weeks.

This is when Jeff mentioned the 60-day rollover rule to access funds tax-free and penalty-free if I really needed the money. Then he recommended I transfer my remaining portfolio over to Fidelity, given I told him Fidelity was able to sell my other municipal bond positions.

I appreciated Jeff’s advice, even though I didn’t act upon either. But what I did do was finally transfer $750,000 to Fidelity to get their higher money market rate. A 5% yield on $750,000 equals $37,500 a year or $3,125 a month if the money market rate stays the same.

Given I was short on funds to buy the house, I needed all the income I could get.

Know When To Be Loyal And Disloyal

When you need the money, you need to serve your immediate best interests. Being disloyal is OK! Move your money and shop around for the best terms when you need to. If you’re trying to protect your assets from a bank run, it’s worth opening up multiple banking relationships as well.

If you have family members to take care of, it’s more important to be more loyal to your family than to a bank. The taking care of your family argument is the #1 reason used by job hoppers to convince themselves to move around.

When you don’t need the money, you can afford to keep your money in financial institutions that pay you less. Even though you know you’re not getting the best rate or the best terms, there’s something comforting about banking with a long-time relationship.

However, if you’re still on your path to financial independence, you might as well try to maximize the return on your idle cash. Some bank is always trying to win new business with better rates and terms.

You shop around for the lowest mortgage rates, the lowest life insurance rates, and the best deals on cars, homes, electronics, etc. Why not also shop around for where to best park your cash?

U.S. Bank Deposit Rates And Treasury Yield / Money Market Rates

I used to think people who just left the majority of their money in a checking or low-interest savings account were either lazy, too rich to care, or ignorant. But now I think another variable is customer loyalty.

Take a look at this chart below from the FDIC. The average U.S. bank deposit rate is 0.63%, despite the average Treasury yield and money market rate at 5.08%. Anybody who leaves their idle cash in a bank that pays the average deposit rate is kind of getting ripped off.

average U.S. bank deposit rates versus average Treasury yield and money market rates - 2023, bank loyalty

But what actually may be happening is that due to customer loyalty, many depositors are simply keeping their money with their existing institution in its existing form. When you then combine the path of least resistance, which is to do nothing, you can see how money just piles up in an inefficient way.

My recommendation is to have three banking relationships to get the best terms and feel the safest. With three banking relationships, you will no longer feel guilty moving funds because you will be loyal to all three.

The Benefits Of Being A Loyal Banking Customer

By being a loyal banking customer, I lost out on ~$3,000 in money market income for a month. That’s annoying since the amount can pay for one month of preschool tuition. However, there are benefits to being a loyal banking customer as well. The benefits just might take longer to recognize.

Looking back at all the help Citibank has provided me since 2001, I now realize I undervalued the benefits of being loyal to a financial institution. Here are some benefits:

  • Easier to get a hold of someone when I have a question or when something goes wrong (peace of mind)
  • Got lower mortgage rates due to relationship pricing ($100,000+ in interest savings)
  • Was invited to sporting events and dinner events ($2,000+ in entertainment)
  • Was offered financial solutions I hadn’t thought of before (e.g. making $200,000 in a structured note)

Sure, Citibank has also made plenty of money off me by charging a spread. But I’ve also benefitted greatly as well.

Customer service is my favorite benefit of being a loyal banking client. Nothing is more frustrating than being on hold for an hour when you’re trying to solve a problem. Having people find solutions for your financial needs and answer questions is worth a lot!

Therefore, so long as Jeff is still with Citibank, I’m going to remain loyal to him. If I end up buying a new house, I will build back my investment portfolio balance to the level it once was!

Reader Questions and Suggestions

Do you think bank loyalty pays? How has bank loyalty helped your finances? How has bank loyalty hurt you? If you view money as liquid, why don’t more people transfer their cash to institutions that pay the most?

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