Novak Online Tax & Acounting
Tony Novak, CPA, MBA, MT
(610) 572-1724 firstname.lastname@example.org
Bank of America as investment custodian
by Tony Novak, CPA, MBA, MT
, revised 11/16/2011
Since the original date of this article Bank of America investment services were combined with Merrill Lynch. The investment fee schedule has been modified recently (with some free services and some more expensive services) but the underlying topics of discussion may still be valuable to investors.
A few years ago Bank of America shook up the investment community by saying that it will offer completely free investment trading for its better customers and $7 trades for others. We have become accustomed to discount trading but completely “free” was a new concept. I was somewhat skeptical but decided to give it a try with three small investment accounts. One of my concerns was the way that the bank calculated account size that took various lines of business into consideration under different rules. A quick reading of the small print on the account disclosure page left me no more enlightened than before. I decided to “just do it” and see what the charges were later.
Results of three test accounts
One account was a regular investment account that made two stock purchases and one sale. The total account size was about $15,000. The account was smaller than the $25,000 minimum specified for the free trading, but Bank of America credited other lines of business (checking, savings, line of credit) so that the total “banking relationship” as measured was more than $25,000. The transactions were executed without a hitch and the trades turned out to be free. I was pleased with the service and communications.
A second account was a small Uniform Trust to Minors Account funded with a deposit of $1,000 which was used to purchase a single stock. Again, the Bank considered the value of “related” accounts rather than just this small account and executed the trade without a hitch. It might be important to note that Bank of America allowed a transfer of funds from a regular (adult) account to a kid’s UTMA account using an online finds transfer function. This made the process very fast and easy. Some investment firms will not allow a change in ownership of funds using this method.
A third account was a larger IRA that was established using a custodian-to-custodian transfer. I always think that IRA transfers take longer than they should, regardless of the custodian, but once the account was established and funds were credited everything else went smoothly. This account planed a handful of “good until cancelled limit orders” for stocks and an ETF fund purchase. The market did not co-operate and the orders remained unexecuted. That was more than a month ago. So I recently went back to review the open order to check status. The order were still listed as open. I checked the historical pricing to make sure that the trading system did not miss a momentary “dip” that might have created a purchase opportunity. There was none, so the account has acted appropriately. I was pleased with the sweeping of funds into a high yielding money market mutual funds to maximize returns while waiting for other investment purchases.
The primary advantage is price. Obviously no competitor can be less expensive than “free”. All things being equal, lower trading costs translate into a higher net rate of return for investors. Bank of America does provide exactly the same service for free while other firms are currently charging a range of fees. There were no trading fees, no new account fees, no maintenance fees, no minimum balance fees and no annual fees.1
A second primary advantage is the ability to move funds quickly and easily between the investment account and virtually any other account (within the bank or outside of Bank of America) by using the advanced online banking features (also free to customers). For example, if an investor needs to sell stocks and send the money to pay American Express to settle a bill for a wedding reception, this can be done quickly and easily with a few mouse clicks. This is a significant advantage over other broker dealer firms that rely primarily on checks by mail to deposit and withdraw funds.
The bank does not offer a separate investment adviser log in feature so this means that an adviser must either use the client’s log in (a possible security concern) or use a remote access software like PC Anywhere or Microsoft’s Remote Access. These tend to be more secure because of the requirement to gain access through the client’s computer and the build in recording of log in session data. But clients may not have the patience for this method and are more likely to tell advisers to take core of management using the first method. The potential problem is that this would likely trigger SEC rules about taking custody of client funds – a practice that not all Registered Investment Advisers are set up for or want to do. Advisers affiliated with another brokerage firm or large RIA are likely prohibited by their firm from engaging in this practice.
A second disadvantage is the lack of testing with investment account management software. This service integrates with basic software like Microsoft Money and Quicken, but we have no information on integration with the more complex software used by investment advisory firms.
Comparison to other custodian services
This service is significantly easier to understand, faster, and less expensive to the client than Schwab, E*TRADE and TD Ameritrade. Investment research is not integrated with the service, but these integrated services are seldom used by advisers anyway. Written statements and confirmations are comparable. Bank of America does not allow multiple client accounts to be listed or managed at once unless the owners are related ion some manner. Based on this very limited trading data, I did not see any differences in execution between Bank of America and other custodians.
Bank of America is a viable custodian for accounts managed by an independent Registered Investment Adviser who is not affiliated as a registered representative with another broker/dealer. The adviser should be properly set up to take custody of client funds to provide the most convenient service for clients. This service is best suited for accounts that are individually managed rather than advisers who make block trades distributed through a range of client accounts. Based on limited testing, I found the service to be flawless. Complete integration with the free online banking feature offered by Bank of America may make this the preferred custodian of choice for many retail investment accounts.
1Although I did not incur any fees in testing, Bank of America disclosures say that the bank reserves the right to charge fees in the future after giving adequate notice. There might be a fee related to required tax filing for tax-qualified accounts, but this would incur at year end.
Status: available for reprint
This article is available for republication in its entirety without charge after obtaining the express written permission of the author.
Pleasee-mail a request to the author that includes the name of the requestor (individual and corporate) and the intended destination of publication.
This Web site is independently owned and operated by Tony Novak operating under the trademarks “Freedom Benefits”, “OnlineAdviser” and “OnlineNavigator”. Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier and has no financial position in any stocks mentioned. Novak may act as and be compensated as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to the companies listed on this site or other commercial companies and non-governmental insurance exchanges. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
141 Jones Street, Bala Cynwyd PA 19004 | P.O. Box 333, Newport NJ 08345