Warning: This post is a bit long and has lots of details. It is not a “get rich quick” scheme. Rather, it is a “maximize your return on idle cash” scheme. You may want to bookmark it and come back to it when the time is right.
I’ve been reluctant to take advantage of the brokerage account bonus offers for a couple of reasons. There are some pitfalls to avoid and important considerations to make when evaluating these offers. Since I’m about ready to take the plunge and pick up these bonuses, I thought I would summarize my thought process for the benefit of others who may be considering doing the same thing.
I’ve resisted these offers, thus far, because they require a larger commitment than applying for a credit card. With a credit card, you only need to commit to the minimum spending requirement and perhaps a few extra months to avoid the unlikely clawback of any bonus received. In most cases, you don’t even pay an annual fee. Brokerage accounts are a bit different. In some cases they require that a sizable chunk of cash (or securities) be allocated and left idle. This creates a pretty substantial opportunity cost and may erase the bonus earned, or at least a part of it. On top of that, it complicates your taxes. Yes, I know, it’s only one more 1099 statement, but who needs more tax headaches. On top of all this there can be fund transfer fees and account closing fees. It’s enough to dissuade a person from doing it. If you’re in that boat, read the tips below to decide if taking the brokerage account plunge is for you.
There are two primary brokerages that are offering substantial bonuses for opening an account: Fidelity and TD Ameritrade. (Sharebuilder does grant 2,500 US Airways miles after the first trade, but this is small compared to the other offers.) The chart below summarizes the primary differences:
The Fidelity offer awards a maximum bonus of 50,000 miles with your choice of American Airlines, Delta or United. There used to be an Amex Membership Rewards offer, but this has gone the way of the Dodo. Due to some of the nuances of the Fidelity offers, it is a more complicated topic so we’ll come back to it after we review the TD Ameritrade offer. All three Fidelity offers look like the one below:
The offers from TD Ameritrade aren’t quite as large, but they also require a smaller investment/funding. There are four identical airline offers available: American Airlines, Continental, Delta, United, and US Airways. There is also an identical Amtrak offer; since Amtrak points can be transferred 1:1 to United or Continental, this offer is no better or worse than the others. In addition, there is a Starwood offer that really stands out. The value of the bonus depends on how much you value the respective points, but for most airlines I value miles at about 1.5 cents per mile (for a total bonus of $375). I figure Starwood points are worth more like 2.5 cents per point (for a total bonus of $500). Factor in that the Starwood offer requires half the investment amount to reach the maximum bonus and it becomes pretty clear this is the better deal. (However, if you really prize the miles of a specific airline, go for that deal instead.) For the remainder of the discussion, I’m going to assume the Starwood offer was chosen. The airline offers look like this:
The Starwood offer looks like this:
You have probably noticed that the ratio of points/dollars invested becomes more favorable as you move to lower levels. However, this is a bonus you can only get once, so it makes sense to aim for the higher tiers. Once you’ve committed to moving some money into the brokerage account, there are some decisions to make and things to remember as you work towards securing your bonus:
- Will this account be funded with cash or by transferring securities? Funding with cash is probably the easiest and cheapest approach, but what will you do once the cash is in the account? Allowing it to get swept into a money market account will provide abysmal returns. This is where a real opportunity cost comes into play. If you have securities sitting in another account, it would be easy to transfer them from one account into this account, however, you will likely be subject to a transfer fee from the account where the securities are currently kept. This fee will vary by brokerage company. The advantage to funding with securities, though, is that your funds will remain invested and your cash won’t be sitting idle.
- You should plan to keep this account open for 9 months. Six months are required to get all the points (half paid after 6 weeks, the other half after 6 months). If you close the account after less than 9 months you will get charged for the value of the points.
- The account must remain fully funded to get the bonus. That is, you cannot deposit $25,000 in cash and later withdraw some or all of it. This will disqualify you from the award. However, if you transfer securities into the account and the value of the securities falls below $25,000, you will still qualify for the award.
- What is your exit strategy for this account? There is a $50 account closing fee and there is likely a transfer fee ($75, if I’m not mistaken) to send securities to a different account. If you don’t plan to use the account in the long-term, you may want to withdraw everything except for $1 just to keep the account open and active.
If you’ve been paying attention, you’ll realize that we’ve run into a conundrum: funding the account with cash is virtually free, but it creates a large opportunity cost issue because the cash is likely to sit idle. On the other hand, transferring securities is likely to cost anywhere from $100 to $200 round trip (into the account and back out, say, to a Fidelity account).
Let’s look at the cash-funded opportunity cost question in a little more detail. For the sake of comparison, let’s start by considering ING Direct CD rates (widely viewed as the most competitive, though you may find better). A 9-month CD earns an annualized rate of 0.6%. If you were to deposit your $25,000 here, you could expect to earn approximately $112.50 ($25,000 x .006 x .75 = $112.50). This is a pretty poor return compared to the value of the bonus. The bonus itself would yield an annualized return of: ($500/$25,000)/.75 = 2.67%. (You will notice that I have multiplied or divided the results above by .75 to arrive at the annualized return for a 9-month holding period.) Another option, putting $25,000 in additional cash into a BankDirect account will earn 2,500 AA miles per month, or 22,500 miles (value: $337.50, annualized return: 1.8%) over a 9-month period. This shows that there is pretty good value in the TD Ameritrade account, but it isn’t hugely profitable compared to other options. If you have a mortgage or other debt, consider paying that down instead of locking up funds with these options, your return is likely to be better.
Now, on to the Fidelity offers. You will need to go through the same series of questions for this account that you did for the TD Ameritrade account: opportunity cost, how to fund (cash or securities), exit strategy and cost to exit, etc. This account has just a 6-month requirement to close (beginning at the time initial funds are received). There are a couple important wrinkles in the Fidelity offers that make maximizing the bonus a bit more difficult: cycling of deposits and the possibility of getting multiple bonuses.
- Deposit cycling: Fidelity awards the bonuses to people who deposit a certain amount of funds, withdraw a portion, then redeposit funds, “cycling” up to the $100,000 threshold. There is no need to have $100,000 in the account, but once $100,000 in cumulative deposits have been made, the bonus is awarded. (In fact, the smaller bonuses are awarded along the way as you cross each bonus threshold.) Calculating the return using this method is very difficult because you can get very different results by recycling a $10K or $35K deposit or funding the account in one transfer/deposit. The practice of cycling up to the deposit requirement doesn’t appear to conflict with the T&Cs, but you probably won’t get any love from a Customer Service Rep if you run into trouble.
- Multiple bonuses: the Delta bonus is available to new Fidelity customers and existing customers. It pays to be smart in this case. The best strategy will be to apply for and complete the requirements for the American or United offer, then apply for the Delta offer. In this way you can get legitimately get the bonus twice.
If you want to dig into the FlyerTalk discussion “phantomtiger”
boasts reports that he was able to get four of these offers (see post #2066 on page 138 of the thread). In addition, “path2″ has outlined a strategy and timetable for the various steps in getting two bonuses (see post #2116 on page 142 of the thread).
These offers definitely require more work, financial capital, and brainpower than a credit card application, but there is a good return to be made if you do it right. Please let me know if you have any tips or questions about these offers.
Did you enjoy this post? Why not share it with a friend?