What are the cons to using a brokerage account for day to day banking?

Question

I've noticed (for awhile now) that my online discount brokerage account carries many features of a traditional bank account:

• Online bill pay
• Direct Deposit
• Checks
• ATM Card
• FDIC or SIPC coverage
• Cash transfers to/from external accounts

Considering this type of account also offers an insane selection of short and long term investment options, I'm wondering what are the cons to using this account for day to day banking.

Answer 1

Make sure you understand the difference between SIPC (Broker-dealer failure) and FDIC coverage, and which funds are protected by which insurance.

Evaluate the account knowing that it is online only, and make sure that the fees and limits work for you.

It takes an awareness of the difference between your investment funds and your normal day-to-day operating funds. Some individuals have trouble separating these types of funds in their mind, and do better keeping them in separate entities.

Answer 2

I think the disadvantage is there fewer branches where you can go in case you need full service, like deposit a lot of checks (mobile deposits have a low limit), get a cashier check, safe deposit box, etc.

Answer 3

Even though this question has already been answered, I'll add a few more points that haven't been addressed, since I have a checking account through my broker. It's separate from my actual brokerage account (different account number), but it's also linked tightly. See below.

I don't know if all of these advantages or disadvantages apply to all accounts, but some of them are worth researching or asking about before opening one.

Disadvantages:

1. To deposit a check, I have to mail it in, which obviously creates a delay. I don't receive checks too often, but when I do, it's a minor hassle to wait up to a week before the broker receives it. There is a mobile deposit feature, but my only phone is through my job, so this isn't an option for me.
2. Checks also take a long time to clear. Sometimes the broker informs me that they received my check, but the funds still won't be available for 3-4 days.
3. When I went to open an Ing/CapitalOne online savings account (to have another place to separate funds; long story), it asked me for my checking account number. When I put in my broker's checking account number, Ing refused it as a "prepaid checking account." I had a similar problem when opening an account with OptionsXPress, although they informed me that this has since been fixed. In short, I don't like my checking account showing up as something it's not.
4. A debit card was mandatory with my account; since I don't use a debit card, I would have liked to be able to refuse this.

5. The account may not actually be managed by your broker. This is an important point. Even though I access my checking account through my brokerage's online interface, behind the scenes it's actually multiple accounts at multiple different banks (see below). My HR department copied my direct deposit number incorrectly, and because of these behind the scenes differences, it took over a month to retrieve the money. The money was actually deposited with UMB bank (who isn't related to my broker), so the indemnity letters took a long time to circulate from UMB back to my broker.

6. This doesn't apply to my checking account, but be sure you check with the broker when opening one of these accounts if you need to also have a brokerage account. My account required it. If you're just looking for a standalone checking account without the option to make trades, a checking account with a broker may not be right for you. Even if you can leave the brokerage account unfunded, make sure your checking account won't be closed because of a lack of trading activity in your brokerage account.

Advantages:

1. My account is a sweep account, so even though it's a checking account, it earns interest. The interest is approximately the standard savings account rate (around 0.7%), which isn't great, but it's better than nothing.
2. My funds are FDIC insured for $750,000, which is three times the standard FDIC amount. Because the money is held in three separate bank accounts behind the scenes (this isn't visible to you, but it's how the account works internally), this allows for triple the usual insurance limit. The multiple accounts behind the scenes fact can be a mixed blessing, though (see above).
3. Despite the lack of physical branches that Vitalik mentioned, I can use ATM's anywhere and the broker will reimburse me any fees, up to 75 times a year (I think; I don't use ATM's enough to hit any limit).
4. I manage the checking account through the same interface as my brokerage account with the company, and fund transfers between them are instantaneous.
5. No minimums, monthly fees, Electronic Fund Transfer fees, etc. I don't know if every brokerage firm offers a checking account like this, but you should research this.

One item that may be an advantage or a disadvantage is that even though the checking account is linked to my brokerage account, it's actually a full-service brokerage account in and of itself. The interface is exactly the same for both, so I can make trades from directly within my checking account too. I don't use this feature much, but it could be either nice to have or problematic for someone who has trouble separating their funds, as mhoran pointed out.

This list is just based on my personal experience with this broker and their associated checking account, so your mileage may vary. Hopefully it gives you a few things to think about and research before opening an account like this.