Careers in finance: Bankers vs. financial planners

By Amy Knapp

According to a recent report, careers in banking and financial services are some of the highest paid in Australia. But are they worth it? Is the $90,000+ salary worth the high stress and fiduciary responsibility, long hours and lack of freedom?

Careers in banking can be very lucrative, especially at the senior management level. But before you jump into a degree in finance or a low level banking job in hopes of a big promotion, consider some of the things you might be dealing with on the job.

Anyone who works at a bank is obliged to the CEOs and shareholders. Bank employees are under constant scrutiny to bring in the big dollars required meet constant demand for sky-high salaries and year-end bonuses. Because of the bonus tradition, there will almost always be pressure from someone higher up.

Not your sky-high salary, of course. You’ll spend the greater part of your career working your way up to a position you may never get. Senior management positions often require a postgraduate degree, years of experience and an outstanding track record. At the very least.

What’s more, you will rarely get any thanks or appreciation. In corporations that large, no one is going to pat you on the back. In some ways, it can be a thankless profession. All work and no play.

Most important to recognise is that you will always be an employee. Even when you get to the upper echelons of the banking industry, long hours will always be required of you. Your vacations will always be regulated. While you may not need to get them approved, you will inevitably have to navigate around your employer’s priorities.

So why independent financial planning?

If you’re truly set on a career in the financial world, you might consider a career as an independent financial planner. Successful people in this profession get a lot of the same perks bank employees do, but without the downside. For example: It’s personal; in a bank you rarely get to build long-term relationships with clients. As you are promoted or moved around in the corporation, your clients are transferred to other advisors. As an independent financial planner, you take your clients with you your whole life long. Relationship building is all part of the fun.

You can offer clients honest, comprehensive services. Banks are limited to the products they offer. When you work for yourself, you can offer virtually any product you think may be good for the client. Service can be customized in a way that is simply not possible at a bank. You can’t put a price on this kind of integrity. At the end of the day, you can be confident you offered the best, most appropriate service to your clients.

You can choose your own hours. At the bank, the clients are sent to you directly. No muss, no fuss. The corporation advertises for you and sends the clients to your door. As an Independent Financial Planner, you have to hustle. Early in your career, you’ll be putting in hours of cold calling and making the hard sales. The bonus is that you will be creating a clientele that is your own, that will return to you again and again for their needs. The fee-for-service model means you can set your own schedule, decide how much you want to make, how many hours you want to work and go from there.

You’re self-employed. Need more be said on that subject? You vacation when you want and work as much as you want. You choose your own desk. If you don’t want to work in a bland, grey office you don’t have too.

You build a residual income. This is perhaps the biggest factor of all. When you work independently, you earn a small percentage of the returns on all of the amount of money you manage. After ten years on the job, your residual income represents a substantial amount of money annually.  When you work for a bank, all of that income goes back to the bank. If you want to make the move to lucrative jobs in self-employment, you start at zero. Is that enough motivation for you?

About the author: Amy Knapp is an HR blogger for InsideTrak, where you can search jobs with anonymous employees reviews from employers across the country.

* Image attribution: US-PDGov

Reasons to join a credit union

 Image attribution: Kenneth Allen. CC BY-S.A. 2.0

The benefits of joining a credit union are actually quite good because it's like banking with perks. With banks the managerial priority is usually to serve its shareholders by gaining profit from banking services. With credit unions the shareholders are members so the result becomes a more affordable banking experience. Credit Unions often serve their members with free services, lower borrowing costs, higher lending rates, and personalized service.

 • Free online bill pay

Online bill pay is a convenient way to pay bills and saves on stamps, time and gas going to the post office. Many credit unions offer free online bill paying services that allow members to literally pay bills through the credit union. Some bill payer services such as the one available at CINCO Credit Union can also be automated to withdraw a fixed amount of money from a pre-specified account every month as bills become due.  

• Free cashiers checks

Another benefit of banking with some credit unions is free cashiers checks. For those who only require one to three checks a month, this can save the cost and hassle of purchasing and managing a check-book. Cashiers checks are also guaranteed so the payee has greater financial assurance of the payers ability to pay. These types of checks are useful for important purchases such as down-payments, but can also be used for other transactions typically involving checks. The Navy Federal Credit Union is an example of a credit union that not only provides members with free cashiers checks, but also allows them to be ordered online. 

 • Free online banking 

Apart from online bill pay, free online banking allows a credit union member to track and monitor banking transactions easily and affordably. Some credit unions such as NIH Federal Credit Union offer free online financial software, free electronic statements or e-statements and have free  tax preparation software built in. Free online financial software can benefit members with financial planning and secure online financial record-keeping.  

• Lower cost credit cards

Credit cards can be expensive, but they can be less financially costly with no annual fees, lower interest rates and fewer surcharges. Credit unions tend to provide their members with competitive interest rates that are useful for consolidating credit card debt or re-directing credit card expenses normally put on higher interest cards. According to Bankrate, Inc. penalty fees on credit union credit cards are also lower. 

• Personalized service

Since credit unions are often relatively small in comparison to banks. This is helpful when seeking to develop a banking relationship with credit union staff and employees. Personalized financial services through a credit union can also assist with speedier and more helpful service. For example, obtaining help with the loan application process, with opening accounts and choosing between different financial products is facilitated through personalized financial assistance.

How small banks manage financial risk

Risk management is the process of limiting risk while maintaining or growing bank profitability. Assessing risk in a small bank is an ongoing function as the banks clients' credibility can change over time. The same is true for business patrons since local markets and economics can also fluctuate based on various supply and demand trends, competition, lending rates etc. 

Risk management for small banks is achieved through implementing a number of risk management procedures that address the various areas of banking risk. This article will address the different types of risks small banks face and how these risks can be ameliorated for the benefit of the banks ownership and operational performance.

Types of small bank risks

Included in the types of bank risks facing small banks are 1) credit risk, 2) interest rate risk, 3) liquidity risk and 4) price risk. (Fraser, Gup and Kolari, p.9) These risks are linked to the banks solvency, investments, lending and borrowing rates, and clientele. If these risks are too high, the banks net income can decline through written off asset accounts, lowered revenue, and in some cases the bank can face undercapitalization. To illustrate the above credit risk, if small bank A makes credit loans to 100 customers, 25 of whom have less than excellent credit, the bank is taking on more credit risk than it would if all 100 customers had excellent credit.

The above credit risk scenario leads to another risk, specifically underperformance. For example, if bank A's management decides it does not want a high credit risk and instead only lends to customers with excellent credit the risk of underutilizing capital emerges if not enough customers with high credit borrow the same amount of money that would have been lent if people with less than perfect credit were allowed to borrow from the bank on credit. Thus, the adept risk manager will be experienced and knowledgeable enough to realize what adjustments to the bank's credit policy will lead to the highest lending return with the least amount of risk for that return. This is accomplished in part by effectively measuring risk.

Measurement of small-bank risk

Risk can be measured partly with the aid of 'risk ratios' which are usually simple division based mathematical scenarios that focus on specific aspects of the banking operation. For example, risk ratios address small bank concerns such as 1) capitalization, 2) liquidity 3) operating efficiency, and 4) interest rate sensitivity. (Fraser, Gup and Kolari, p.76-80) Moreover, capitalization ratios quantitatively determine how much money a small bank has set aside for loan charge offs in relation to the amount of loans made. 

This is calculated by dividing the loan loss reserve of a bank by the total dollar amount of loans. Risk management theory can be extensive and involved for the purpose of focusing on sufficiently accounting for and dealing with unnecessary risk. The result of this theory yields a number of risk management case studies and forumulaic, quantitative and qualitative measurements with statistical probabilities of success and viability in some cases. Essentially, if the risk a small bank faces can't be measured, that risk becomes a greater hazard to the bank, hence the need for risk management metrics.

Implementing risk management

Implementation of risk management policy involves developing a risk management bank policy that takes into account risk management metrics/measurements with the goal of profit optimization. This requires the bank's management to accurately record, monitor and forecast financial scenarios in which the bank can operate safely and profitably. The task of risk management is performed well when the small bank manager has a firm comprehension and sensitivity to the quantitative and qualitative factors within the banking industry. Over time, experience and knowledge of the banks capacity combined with adequate metrics and forecasting may yield a successful risk management policy that provides the bank with the financial security and success it often seeks.

Additional forms of risk management involve Federal regulatory policies that impact how a bank can borrow and lend funds, the services the banks can provide and how banks disclose information to their clients and the government for insurance and consumer protection purposes. Still further risk management positively affects the banks legal positioning through sound compliance with banking law in addition to strong public relations that can assist with lowering a banks reputational risk. Technological risk is another area of risk that can be soundly dealt with through a banking information technology management.

Summary

Small bank risk management deals with sources of risk to a bank whether it be financial, digital, legal or social and implements risk management policies to prevent and lower the various types of risk that can affect a bank and as described in this article. Implementation of risk management requires the bank's management to monitor, assess and supervise the banking operation to ensure enhanced profitability, adequate capitalization, needed liquidity, regulatory compliance, public relations and unnecessary debt for the bank. Experienced bank managers are or should be familiar with the banking environment, market forces, banking policies and regulations and sound financial management to properly deal with the risks that can face a bank in its daily operations.

Sources:

1. Fraser, Gup and Kolari. 'Commercial Banking: The Management of Risk' 2nd edition' South-Western College Publishing, Cincinnati, Ohio. 2001.
2. http://www.chicagofed.org/banking_information/legal_reputational_risk.cfm
3. http://www.chicagofed.org/banking_information/risk_management.cfm
4. http://fic.wharton.upenn.edu/fic/papers/1096.html

Bank of America Website Review

Image attribution: Mark Holloway. CC BY-SA 2.0

The Bank of America is predictably branded with red, white and blue colors which commercially is consistent with its brand image and therefore its brand equity. As for the actual functionality and use of the website, it's what one might expect from a bank i.e. not to flashy, practical and slightly impersonal and intent on delivering and/or informing existing and potential clients of banking products and services.

Band of America website features

The features of the website do include some useful features that can make both individual and business banking more manageable and streamlined. The range of products and services is quite broad allowing the website to cater to a larger demographic market share. However, the site is somewhat impersonal and seems to assume an innate sense of banking among its visitors.

For persons who might find themselves confused on the website there is somewhat unenthusiastic help link at the top right of the home page that leads to a 'select state" scroll down menu. After clicking on one's State, one is then forwarded to a list of frequently asked questions and few if any phone numbers that put one in touch with anything other than an automated voice system. A few of the website services are included in the following list:

• Online Banking

• Products and Services

• Small Business Banking

• Web Mortgage application 

• Other loan applications

Navigational aspects of the website

Available in both English and Spanish, the Bank of America website has functional links to a vast amount of banking information including military banking, fee schedules, retirement financing, car loan information, wealth management and much more. One does need to be somewhat literate in the wide range of banking products and services to fully navigate the website. However, if one knows what he or she is looking for before visiting the website, it is generally just a matter of finding the correct tab or link.

The website homepage is organized with red tabs toward the top of page that help channel clients toward personal, business, and corporate banking pages and the default page is the personal banking page. Very evident on the home page is the online banking feature and at the time of writing this article, an advertisement for a bank of America credit card which may be a little off putting to some visitors. After all who wants to visit a website to immediately be made an offer of sale.

Additional aspects of the website

Comprehensive is probably a good adjective to describe the website although it tends to not make bold statements concerning interest rates and inward looking information such as banking ratios that measure the banks performance as a financial institution. In other words, the information presented on the website seems selective and geared toward a factual presentation of products and services rather than benefits and advantages. Other information included in the website includes standard information that might be typical to many other banking branches. Some examples of such information are listed below:

• Privacy and Security information

• Disclaimers and Banking terms

• Bank Information, financial statements and community information

• Locations and Branches

In reviewing the Bank of America website, one might fell slightly overwhelmed by the large amount of banking needs the site is able to meet. For this reason it may come across as overly functional or have too much information on the homepage. The site also doesn't come across as warm and friendly which is somewhat typical for a bank, but may deter some people from using it. In terms of functionality, the site is quite complete and can be a useful resource to individuals and businesses serious about banking, however few if any incentives or benefits seem to jump out of the websites pages from behind the inferred commercial goals of the bank.

Source:  https://www.bankofamerica.com/

What are hybrid savings accounts?

Hybrid savings accounts are banking instruments that allow clientele to combine banking services and benefits into one account. All U.S. Savings accounts are subject to the Federal Reserve's Regulation D which outlines the rules and requirements by which banks must operate savings accounts.

To illustrate hybrid savings accounts further, to qualify as a savings account, one requirement is that  no more than six transfers or withdrawals may be made by internet banking transactions. In so far as savings accounts conform to banking regulations, several types of hybrid savings accounts exist that have differing banking features, services and choices. The following is a review of some types of hybrid savings accounts.

• Frost momentum account

The Frost Momentum account is a hybrid account offered by Frost National Bank. This account has a variable interest rate linked to debit card spending i.e. the more a debit card is used, the higher savings interest can go. The account also offers charting and budgeting tools to help meet spending goals while simultaneously building savings.

• Negotiable order of withdrawal  (NOW) accounts

Negotiable order of withdrawal or NOW accounts are a type of savings account that also allow checks or drafts to written against them. However, according to Regulation D, NOW accounts are not exclusive to savings accounts but also pertain to pension funds and escrow accounts.

• Money market accounts

According to Money Economics, money market accounts are hybrid savings accounts because they too combine savings account regulatory compliance with higher yielding accounts that also allow checks to be written against them. In order to qualify for higher interests rates however, money market accounts may also require a high minimum balance. Many varieties and types of money market accounts exist on the market.

• Hybrid Savings/CD

Another type of hybrid savings account combines Certificate of Deposit savings with checking privileges. The First Mariner Bank offers one such product that links allows checking withdrawals via transfers from another account at the bank. In essence this account allows one to earn a high rate of savings while also writing checks against the higher yield so long as a minimum balance is maintained. According to the First Mariner Bank, this hybrid savings/CD account is also insured by the Federal Deposit Insurance Corporation (FDIC)

• Hybrid yield savings

Some savings accounts offer balance linked interest rate yields that offer a higher rate of return on balances up to a certain amount and then a lower rate on balances above that. The Boeing Employees Credit Union (BECU) in Washington State offers one such account. The hybrid BECU member advantage savings account currently offers a yield of 6.17 percent for the first $500 and a .5 percent yield for amounts above that.

Sources: 

1. http://bit.ly/9EjN92 (GPO Access: Regulation D)
2. http://bit.ly/bbpWUq (Frost Momentum)
3. http://bit.ly/d5TTNx (1st Mariner Bank)
4. http://bit.ly/adAxxN (Moneyeconomics.com)
5. http://bit.ly/cElIo4 (Boeing Employees Credit Union)

Kinds of Banks by Ownership Types

Depending on where in the world a bank is owned, that ownership is determined in part by regulatory laws. In the United States legislative acts such as the Bank Holding Company Act of 1956 and Gramm-Leach-Bliley Act of 1999 influence allowable bank ownership structure. Several kinds of bank ownership types exist.

• Bank Holding Company

A bank holding company may be owned by a combination of shareholders and/or companies. Bank holding company's themselves own multiple banks, hence the term bank holding company. Examples of bank holding company's are Bank of America,  HSBC North America and Goldman Sachs.

• Foundations

Foundations are financial entities that provide cash flow for organizations that may include some types of banks. For example, the Bill and Melinda Gates Foundation provides banking services for underprivileged groups also known as micro credit. Foundations can also own hedge funds that are considered custodial banks in the sense they don't provide traditional banking services.
• Central banks

Central banks such as the U.S. Federal Reserve Bank have unique ownership structures with strict ownership criteria. In the case of the Federal Reserve Bank, member banks within the Federal Reserve System own it. These shares yield a fixed six percent per year return and the banks structure and authority is derived from legislative decision making. The ownership of the Federal Reserve Bank is non-negotiable meaning it is pre-determined.

• Private owned

Private owned banks are the kind of banks owned by venture capitalists, partnerships, and limited liability corporations. Ownership of these banks is not open to anyone but private shareholders thereby restricting managerial intervention via selective  decision making. These types of banks may provide specific financial services such as offshore banking. Examples of banks providing banking

• Public banks

Public banks may also be bank holding companies and have ownership shares available to the public. Shareholders determine the Board of Directors for these banks and activities and financial statements pertaining to the company is public information. For example, in the United States, public banks such as Bank of America are required by law to register financial documents with the Securities and Exchange Commission.

• Government banks

Government banks are owned by the government and may include government subsidized financial institutions that provide nationalized banking services. Fannie Mae and Freddie Mac are examples of government chartered public banks that were nationalized in 2008 for the purpose of economic stability. Depending on the political and economic structure of a country, governments involvement in banking may be limited are extensive.

• Community banks

A kind of bank that is owned by a community is a credit union. Credit Unions are federally regulated financial institutions that are owned by members and not the public. This means the credit union directly serves the interests of those individuals to whom banking services are provided. On a larger scale, the World Bank is also a community bank in the sense it is owned and serves a cooperative community of 187 member countries rather than corporations or individuals around the world.

Sources:

1. http://bit.ly/9LDvUP (Federal Deposit Insurance Corporation)
2. http://bit.ly/15btOH (Federal Reserve Bank)
3. http://bit.ly/9cmFo8 (World Bank)
4. http://bit.ly/18xYna (Federal Financial Institutions Examination Council)
5. http://bit.ly/9EP39B (Alston & Bird LLP)

Advantages of Interstate Banking For Personal Accounts

Interstate banking provides financial security, increases banking services, and provides more efficient, cost effective banking to clients with personal accounts. Moreover, advantages of interstate banking emerge out of increased competition and effectiveness among banks that have utilized interstate banking privileges and competitive financing options for consumers.

Improved and efficient interstate banking advantages was the reasoning for interstate banking back in the 1980's when banking deregulation was taking its early steps.(1)  By 1994, interstate banking had become a legislative reality with the passing of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. (4)

• Interstate check deposits

Before interstate banking was allowed, interstate banks owned by the same company had to be subject to interstate agreements allow acquisition of the out of state banks, and  individuals could not make check deposits despite the interstate bank ownership.(2) Moreover, this restricted individuals from making deposits into their personal accounts at bank branches that did not have an interstate agreement even if they were owned by the same firm according to the St. Louis Federal Reserve Bank. Interstate deposits allow business people, travelers,  and people who work and live in different states more convenient banking options.

• Competitive interest rates

With interstate banking comes economies of scale, combining of banking assets for increased loan activity, and more competitive interest rates due to the cost savings banks incur from profitably expanding their operations across state lines.(3) In other words, when banks are able to lower their costs by efficiently branching out management across state lines the costs can be passed on to consumers through interest rates that attract more profitability for the bank and better returns for clients.

• More banking locations

A clear advantage of interstate banking is the number of possible branch locations at which banking services can be rendered to clients.(2) This convenience not only can increase banks revenue but also better facilitates interstate banking activities that can grow consumer wealth. For example, individual proprietors that can spend less time making deposits and taking care of personal/business banking transactions can also increase their efficiency, and potentially their profitability as well.

• Increased service options

Another advantage of interstate banking is increased services. These service can arise out of more resources that become available to the bank through interstate banking acquisitions and branches. (3) Additionally, a wider range of clientele also puts increased pressure on banks to provide a greater range of services. Examples of enhanced services may include personal account electronic banking, expanded loan products, and more voluminous transaction types.

• Financial security

In his book 'Banking Across State Lines' Peter Rose asserts Interstate banking can benefit consumers by improving financial security regarding funds within their personal accounts. More specifically, Rose claims that the consolidation of banks to form larger corporations tends to have a stabilizing affect on bank assets thereby better protecting consumers from bank insolvency. Even though bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), having to claim such insurance against lost assets is generally not a slight inconvenience, but rather potentially financially debilitating to banking customers who rely on one bank for all their banking needs.

Sources:

1. http://bit.ly/4xOpuh (Time)
2. http://bit.ly/dhZSRs (St. Louis Federal Reserve Bank)
3. http://bit.ly/c1I1pJ (Rose: Banking Across State Lines)
4. http://bit.ly/b2yGXU (FDIC)

Mutual Funds Review: Russell 200 Index Funds

Russell 2000 index funds are mutual funds and exchange traded funds (ETFs)based on the Russell 2000 index (^RUT). The Russell 2000 index is an equity weighted price metric for small capitalization companies also known as small caps. The Russell 2000 is considered an important index for measuring the performance of smaller companies across various industries and has several key features.

• Measures performance of companies with less than $1 billion in equity
• Consists of 2000 U.S. Small Capitalization companies
• Diversified across a number of industrial and service sectors
• Weighted for capitalization

Funds that attempt to correlate either directly or inversely with the index are trying to provide investors with a basket of small cap businesses similar in size and performance to those companies within the Russell 2000 index, or in the case of inverse funds, financial instruments believed to perform contrary to that of the businesses within the Russell 2000. Some Russell 2000 Index funds are listed below.
Russell 200 Index Funds

Two fund families that have several Russell 2000 Index related funds are iShares and Rydex, and a third company managing Russell 2000 related assets is Proshares. The 'I' in iShares stands for index and the Rydex fund family is named after the asset management company overseeing the index portfolios. Both iShares and Rydex fund families are run by experienced and well known global asset management firms.

• iShares Russell 2000 Index (IWM)
• Ultra Russell 2000 ProShares (UWM)
• Rydex 2X Russell 2000 (RRY)
• Rydex Inverse Russell 2000 Strategy A (RYAKX)

Russell 200 Index Funds performance

Performance of Russell 2000 Index funds varies between the function and type of asset management the fund undertakes. Since many of the Russell 2000 Index funds attempt to mimic the Russell 2000 index performance, a high correlation between the fund and the index is desirable in addition to fund returns and low fees.

Small capitalization funds that are solely dedicated to matching the index return tend to perform weakly in poor economic times. However, the inverse hedge strategy fund managed by Rydex has been able to perform its role of contrary performance to the market through its investments in Government securities.

The risk level for several Russell 2000 Index funds is quite high due to the size of the fund's underlying assets, however, not all Russell 2000 Index funds invest in the same companies as the index meaning performance can vary. Expense ratios below 1% are common among Russell 2000 index funds, an example being the iShares Russell 2000 Index (IWM) at .15% . (finance.yahoo.com). The size of the funds themselves ranges from small to large, growth to blend meaning the fund may have billions of dollars of liquid assets in the Russell 2000 index companies or companies like them, or have either growth, value or combination categorized companies in their portfolio.

Derivative leveraged Russell 2000 funds such as the Rydex 2X Russell 2000 (RRY), utilize these financial instruments to increase returns on the base Russell 2000 Index, hence the 2X in the fund name. Naturally, when the Russell 2000 Index performs poorly, the Rydex 2X Russell 2000 index is more likely to amplify losses experienced by non-derivative leveraged funds. The Ultra Russell 2000 Proshares fund (UWM) also seeks to double the performance of the Russell 2000 index.

Summary

Russell 2000 Index funds are a class of funds ranging from small to large, value to growth that make use of the Russell 2000 Index as a base metric to 1) replicate 2) multiply and 3) inverse. Several Russell 2000 Index funds have low expense ratios below 1% and do correlate with the Russell 2000 index. Some of the Russell 2000 Index funds offer dividends in addition to any capital appreciation incurred through ownership of the fund's shares.

The performance of Russell 2000 Index funds varies dependent on factors such as fund function, management, type, diversification and other key variables. Incorporating Russell 2000 Index funds into an investment strategy could correlate the index's risk making a risk assessment of one's investment strategy important to one's investment planning. Consulting a financial adviser or planner may assist in the process of incorporating the right funds into ones financial plans and/or goals.

Sources:

1.http://www.streetauthority.com/terms/index/russell2000.asp
2.http://finance.yahoo.com
3.http://www.rydex-sgi.co
4.http://www.proshares.com
5.http://www.ishares.com
 
Originally written 06/01/2009 

An overview of certificate of deposit rates

Certificates of Deposit (CD's) have numerous interest rates depending on 1) duration of the certificate, 2) denomination of the certificate 3) type of CD and 4) issuer of the certificate. Different banks, financial institutions within various regions and countries offer interest rates that may be higher or lower than one's local financial institution.

This does not mean, CD's from non-local sources cannot be purchased. Certificates of Deposits are insured in the United States Government up to a certain amount. This article will discuss the following aspects of Certificate of Deposit interest rates.

• Differences in fixed and variable CD interest rates
• Compounding options
• Comparing CD alternatives
• Insurability of interest bearing CD's

Differences in fixed and variable CD interest rates

Interest on certificates of deposit is calculated periodically at a fixed or variable rate that is usually higher for larger deposits and longer time periods. For example, a 5 year CD for a value of $1000.00 may have an interest rate as a Jumbo $100,000.00 CD deposited for only 3 years. However, a $100,000.00 CD deposited for 5 years may have a larger interest rate than both the $1000.00, 5 year CD and the $100,000.00 3 year CD.

Different U.S. certificate of deposit rates can be compared online using tools like the bankrate.com rate comparison calculator. In the case of variable rate certificates of deposit, part or all of the interest on the certificate of deposit is linked to changes in national interest rates such as the prime rate. In such cases, when the prime rate changes, so does the interest rate on the CD. Still more variable CD's may have pre-determined changes in interest rates or market index based rate changes.

• Fixed interest rate
• Variable prime rate linked rate
• Market index based rate
• Scheduled changes in interest rate

Compounding options of CDs

Not all certificates of deposit compound the same way that means two CD's with the same deposit value, length of deposit and interest rate could yield different ending interest calculations. To illustrate further, depending on the policy of the financial institution(s) issuing the CD's, interest on the CD's can be compounded daily, monthly, quarterly, annually, or any other way that is deemed useful to the issuing institution. (monitorbankrates.com)

What this means is that the interest on the new balance with interest is calculated more frequently leading to a higher amount of accumulated interest. For example, a $10,000.00 CD compounded annually for 2 years at a rate of 5% will yield an ending balance of $11,025.00 whereas a $10,000.00 CD compounded daily for 2 years at a rate of 5% will yield an ending balance of $11,052.00. The bankrate.com website calculator also has an interest rate calculator that automatically compounds the interest on monthly compounded and other types of CD's.

Intertnational, credit union, and bank CDs

Various different financial institutions offer certificates of deposits to clients. For this reason, shopping around for the best CD rate can be beneficial as financial practices, regulations and policies of financial institutions varies form institution type and governing authority. Some of the higher international certificate of deposit annual percentage yield rates are listed below as sourced from money-rates.com, and offer double the yield of U.S. CD's and higher. A disadvantage of these CD's are that the banking regulations protecting CD holders are different from country to country, be subject to foreign currency exchange fluctuations, and minimum deposits may be required.

• South African 6 month CD 8.75%
• Brazil 3 month CD 6.40%
• New Zealand 6 month CD 6.22%
• Australian 6 month CD 5.58%

Credit Union Certificates of Deposit are insured by the National Credit Union Share Insurance Fund (NCUSIF) which is a federal insurance program that protects depositors up to an amount the same as the Federal Deposit Insurance Corporation (FDIC) Rate i.e. $100,000.00 or $250,000.00 depending on the time period in which deposits are made. U.S. Credit Union CD's aren't necessarily better than U.S. bank CD's as a 6 month rate comparison between bank CD's and Credit Union CD's indicates the bank yields aren't always necessarily lower.

Summary

Interest rate yields on Certificates of Deposit vary considerably across financial institutions, CD types, and issuing currency and/or country. Certificates of Deposit interest rates may be fixed or variable and calculation of interest may compound at fixed intervals ranging from daily to annually.

In the United States, Certificates of Deposit provide an insured way to save earning interest higher than typical savings or money market accounts. The insurance of bank and credit union issued CD's is limited to the pre-set federal insurance per account that is currently $250,000.00. However, this insured amount was scheduled to revert back to $100,000.00 of coverage starting in 2010 pending any future adjustments.

Sources:

1. http://www.bankrate.com/brm/rate/deposits_home.asp
2. http://www.fdic.gov/deposit/deposits/index.html
3. http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp
4. http://www.money-rates.com/intsavings.htm
5. http://www.ncua.gov/shareinsurance/
6. http://www.bestcashcow.com/cash_equivalents/fcuaccounts.html
7. http://financial-dictionary.thefreedictionary.com/Variable-rate+CDs
8. http://www.fdic.gov/deposit/deposits/certificate/index.html

The Different Types of Banking Institutions

There are several types of banks in the United States however after banking deregulation in the 1990's some of the services previously prohibited to banks became available. This led to interstate banking and multi-functional banking.

Nevertheless, some banks retain their distinct roles and these represent the different type of banking institutions. Furthermore, banking in the future may change as evident in this banking report entitled 'The Future of Banking' by the Federal Deposit Insurance Corporation (FDIC)

Banking is multi-layered, multi-faceted nexus of institutions that provide for various levels of community, local, national and international finance needs and services. Banking is a fundamental cornerstone of an economy in which money and services are entrusted.

Many nations rely heavily on their banking systems to help manage their everyday personal, business, and financial management priorities. To illustrate the wide variety of banking and banking types a categorization of bank types follows:

• Retail consumer banks

Retail banks are those banks we are most familiar with. They provide savings accounts, checking accounts, small car loans, and credit cards. Retail banks are an essential part of any banking system as they allow a secure place within which to store and grow money. Retail banks are thus important to the banking system and the economy.

• Consumer operated banking services

Consumer banking can involve private banking such as that facilitated through Prosper.com through which private lenders and borrowers interact without the use of traditional banking means. However, the more common type of banks include local banks and Credit unions. The services provided by these banks are typically designed to meet everyday demands such as car loans, bill paying services, savings accounts, Individual Retirement Accounts, cashiers checks, money orders, electronic deposits and withdrawals and mortgages.

• Mortgage Banks

Although many consumer banks provide mortgage servicing, an example being Bank of America some banks specialize in this business. Included in this category are Real Estate Investment Trusts (REITS), Federally Subsidized Mortgage Financiers such as Freddie Mac and Fannie Mae, Public Mortgage lenders like Countrywide Financial Inc. and online banks such as Lending TreeAll specialize in different types of loans but often distribute their loans over various types such as Sub-Prime loans, Prime Loans and Alt-A loans. Mortgage banking can also be accomplished through online banks.

• Investment Banks

Investment banks such as Morgan Stanley primarily provide investment services such as financial planning, asset management and retirement forecasting and savings services. Although the role of banking institutions has changed with banking regulations, these banks still focus on the investment side of banking.

• International Banks

International Banking can involve very large amounts of money. Corporations and Banks borrow money from overseas banks in large quantities if the price is right. Overnight banking, exchange rate swaps, and interest rate hedging are some of the services utilized in overseas banking. At a larger scale are banks such as the World Bank and International Monetary Fund that finance countries and large scale developmental projects.

• Corporate Banking

Many corporations do banking of their own. They offer corporate bonds similar to Government bonds that can be only slightly more risky depending on the corporation providing them. An example of Corporate banking is State Farm Bank which provides banking services, credit cards and loans. Many corporations provide banking services in addition to their primary function to help facilitate business operations.

• Government Banking

The United States Federal Reserve Bank plays a major role in national banking. It is the hub for all retail banks in the United States. The Federal Reserve implements banking regulation, monitors money supply, sets interest rates and manages the Government's money. Government banking also includes mortgage banking such as loans administered by the Federal Housing Authority (FHA) and the Housing and Urban Development program (HUD). What's more, federal and municipal governments raise funds by issuing debt instruments such as bonds and treasury bills.

Summary

In summary, the above illustrations indicate the primary tasks and functions of banks and what sectors of the economy they serve. The scope and nature of these banks is generally more complex and involved than a brief description can illustrate. Also, other types of banking do exist as banking can become highly specialized.

An example of a niche banking experiment is micro-lending, a form of banking recently implemented in India on a large scale by the 2006 Nobel peace prize winner Muhammad Yunus of Grameen bank. In this type of banking very small loans are provided to poorer individuals with flexible loan terms to assist them in generating income from their skills and resources.

Banking is an ever evolving field that requires constant oversight, legislation and design as banking needs, technology and the business environment change. Our modern day Banking system is probably the most advanced the World has ever known and is truly a marvel of human organization.

Source:

Donald R. Fraser, Benton E. Gup and James W. Kolari. 'Commercial Banking: The Management of Risk 2nd ed' Cincinnati, Ohio. South-Western College Publishing, 2001.

The difference between banks and credit unions

Banks and Credit Unions are both financial institutions that provide financial services, however several differences distinguish the two types of financial organizations. This article will discuss the difference between banks and credit unions in terms of four key areas 1) regulatory bodies, 2) primary interests, 3) deposit insurance, and 4) financial services. It will become clear through illustration of these differences, that banks and credit unions are indeed quite different from one another, and that different advantages and disadvantages stem from these differences.

• Regulatory legislation and agencies

Credit Unions are regulated by the Federal Credit Union Act of 1934 in addition to some shared regulatory legislation with banks such as the Fair Credit Reporting Act and The Depository Institutions Act of 1982. However, banks are regulated by the Federal Reserve Board and the Federal Deposit Insurance Corporations which credit unions are not. Moreover, credit unions are regulated by the National Credit Union Association (NCUA) , whereas banks are not. Some federal agencies and supervisory organizations such as the Office of Comptroller of Currency (OCC) and ,the Securities and Exchange Commission (SEC) may oversee aspects of both bank and credit union operations. Laws governing both U.S. banks and credit unions are codified in Title 12, of the U.S. code.

• Shareholder profit vs member ownership

The primary interests of a bank or credit unions are those parties who's objective(s), the financial institutions represent. For banks, the shareholders and owners are both influential and an important interest be they private or public, Credit Unions on the other hand are member owned and thus the members' interests are of primary interest. This is not to say there are no additional interests in these financial institutions as there may be administrative, employee, regulatory and commercial interests as well. However, since these latter interests may be common to both banks and credit unions, the difference in ownership interest is a more distinct difference of interest.

• Federal deposit insurance

A second difference between banks and credit unions are in how they are insured, and regulated. Bank deposits are insured by the Federal Deposit and Insurance Corporation (FDIC) whereas Credit Union deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF). Both these organizations are Government chartered to protect both confidence in financial service institutions and the public's money through deposit insurance. Currently, in 2010, this insurance protects up to $250K of deposits for each account for both banks and credit unions; however this amount was originally intended revert back to $100K of insurance following the fallout from the 2008 financial crisis.

• Scale of financial services

Banks generally have greater legal, service, and financial scope. The financial services offered by banks and credit unions are largely the same, however the policy regarding these services can be quite different between the two due to the primary interests. Since banks are more concerned with profiting owners, bank members may be subject to more penalties, more service fees or surcharges, and higher interest rates whereas credit unions are more concerned with benefiting members who's interest is not paying more than they need to for services and financing. For example, a bank may charge for use of online banking and bill pay whereas a credit union may not if it can remain financially solvent and functional without such fees.

The difference between banks and credit unions can be good and bad for consumers. For banking clients, the number of service options, bank products and access to financing is generally higher, albeit mostly at a higher cost. However, credit unions are efficient and affordable for small loans, cash deposits and basic financial services. Many credit unions are also smaller and have members who often share a common interest such as place(s) of employment, and industry affiliation. In other words, credit unions are more individually, occupationally, and member focused whereas banks may be more commercially, profit and economically orientated.

Tips for choosing a financial planner

Financial planners are professionals who's primary function is to help a client expand, and make the most of their financial assets. The best financial planners will support a client's possible objectives of fiscal empowerment, financial freedom, and optimized money management. A client should leave a financial planner feeling satisfied the service they have received will put them in a better financial situation.

Financial planners who don't put their client's needs and financial goals ahead of their own corporate objectives are more like a competing business that offers financial planning services to its competitors. Since financial planners charge a fee and/or commission for their services there should be no complication regarding this matter because these fees and commissions, if reasonable, should be all a financial planner needs in exchange for services rendered. A few important functions financial planners should be capable of, are the following:

• Growing money
• Facilitating financial needs
• Managing monetary goals
• Advising on financial issues
• Knowledge of, and Promotion of investment products and services

In addition to the above services, things to look for in a financial planner also include the following important traits, characteristics and qualifications.

License

While a license is not required to be a financial planner, Certified Financial Planners (CFP's) are specifically trained for the purpose of financial planning. Certified Financial Planner's certification includes at least 3 years of experience in financial planning, ethics review, and rigorous examination.

Not all certified financial planners are guaranteed to be able as some non-certified financial planners. Nevertheless, in case of doubt, certification does increase a client's chances of receiving the best possible service. Depending on one's specific needs, other certified and/or licensed financial professionals may be more suitable.

Professionalism

Organizations such as the Financial Planning Association and the International Association of Registered Financial Consultants may offer assistance in finding reputable financial planners. What's more, since money is sometimes a sensitive issue for individuals, a professional financial planner is desirable for several reasons.

First, people's money is not something to be taken lightly and a financial planner should be able to treat client's money with integrity, respect and with all the intentions of the client in mind. Second, if a financial planner does not take his or her function seriously, they may not take the money they help manage seriously either. While this is somewhat a matter of trust, professionalism inspires trust..

Financial institution

The company or organization a financial planner works for may having bearing on the quality of service offered in addition to complimentary services and products. Both large and small financial planners may offer unique advantages. For example, a large well financed company that provides financial planning services may also have its own investment products available, proven track record and established performance. However, smaller financial planners may be able to offer more personalized service that may include a more tailored financial plan.

Financial packages

A financial planner may or may not be able to provide special incentives for using affiliated financial products and services. If a financial planner or service does not offer sponsored products, they should still be equipped and knowledgeable about where to find the best, and most suitable investment and financial instruments to help meet a clients needs and expectations.

Among the services and products a financial planner should be able to advise upon are investing, budgeting, retirement planning, net worth optimization, and end of life asset management. In addition to these services, a financial planner may also be knowledgeable about certain business financing concerns and bureaucratic financial procedures.

Experience and knowledge

Financial planning services can be of assistance to both fiscally experienced and savvy clients and inexperienced clients alike. The reason for this is managing money and assets is the profession of a financial planner.

Consequently, they may know of technicalities and monetary plans even well aware clients may not have knowledge about. In other words, even if the need is small, financial planners may offer important guidance in fine tuning and/or adjusting individual, and in some cases, business financial goals.

Terms of service

The terms of service and fine print are important and become more important with higher amounts of money being planned. The fine print in a financial planning agreement can include information on fees, commissions, liability disclaimers, asset protection clauses or lack thereof, privacy disclosures and any other legal or technical issue that may arise in the future. Taking the time to read the fine print and understand what it means could mean the difference between losing one's assets and keeping them however unlikely that scenario is.

Financial planners should ideally meet some, if not all of the aforementioned requirements. When considering the above mentioned items, choosing or deciding to utilize the services of a financial planner and/or financial planning corporation can be made easier. While not all financial planners offer standardized services and products, a financial planner that meets the criteria contained herein may be better positioned to provide a more complete and beneficial financial planning service.