NetBanker 2.0

Brokers Push Margin Loans

Flipping through the latest issue of SmartMoney magazine, it came as no surprise to see a full-page advertisement from Fidelity. But what caught my eye was the subject matter. Margin loans.

And this was no soft-sell pitch with smiling 50-somethings sipping Chardonnay on their deck. It was all business, showing how Fidelity's margin-lending rates fared against those of its major competitors. The hard-hitting approach isn't carried through to its website though, which opts not to show any comparative data.

E*Trade, one of the best financial marketers, is said to be offering teaser rates as low as 3.99% to encourage investment clients to transfer higher-rate debt to their margin accounts (WSJ, 4/20/06). However, its published rates vary from 6.74% to 9.74%. The retail banking sweet spot, loans of $50,000 to $250,000, are priced at 8.74%.

Fidelity doesn't go quite that low. Rates vary considerably depending on the balance, but under $500,000, borrowers pay 8.5% to 10.5%. Only those borrowing more than $500,000 pay an ultra-low rate of 5.5% (see inset for current rates).

Analysis
What's going on here? Brokerage firms are finding that customers are willing to borrow against their securities to finance all types of non-investment purchases. UBS AG's wealth management unit says that 75% of its $10 billion in margin-loan outstanding has been used to purchase things other than securities.

Expect more competition from brokerage firms as empty nesters and younger retirees finance portions of their lifestyles with loans against their investments. Deferring tax liability on portfolio gains is a big part of the decision to borrow. But there's also the psychological aversion to seeing investment balances decline.

Financial institution loan officers should be well versed on the risks of margin loans, and instead offer home-equity loans and cash-out refinances with similar rates and no risk of a potentially disastrous margin call.

--JB

Final score: Steelers 2, Seahawks 1

As we analyzed PNC Bank's identity protection services (see previous article), we happened to notice this timely photo of its hometown Pittsburgh Steelers, scheduled to compete Sunday in the Super Bowl against the Seattle Seahawks (click on inset for closeup). PNC is the official bank of the Steelers.

We were curious as to how many banks were leveraging Super Bowl fever in the states of Washington and Pennsylvania. Using Yahoo's directory, we found only one of 27 Washington Banks (see below), and two of 68 Pennsylvania banks with homepage references to their home teams.

And only First Mutual Bank <firstmutual.com> in Bellevue, Wash., has a promotion tied to the big game: a 4.05 percent "Championship Rate" on its High-Yield Money Market Deposit Account (click on inset for closeup).

The two Pennsylvania football tie-ins were simple eye-catching graphics on the homepage from Fidelity Bank (click on inset right for closeup) and PNC Bank (see above).

--JB

Editor's Note: Since the Steelers won 21-10, we are wondering whether bank website appearance may be a leading indicator of Super Bowl performance. We'll see next year.