Money doesn't actually talk. We do.

The Great Bank Account Hunt (Is Over): The Fidelity Two-Step

Ok, for those of you tuning in to the middle of our programming, here’s the briefest of recaps:

• I bank at Citibank
• Like most of you that use the bank on the corner, I get hit with all sorts of fees.
• I hate Citibank.
• I want a checking account that reimburses me for all ATM fees, has no fees or minimums of its own, has a good online setup and pays me a stupid amount of interest for storing my money there.
• Until recently, I thought that none of this was possible.
• I was wrong.
• Turns out most, if not all, of the best banking deals can be found at online banks.
• After some initial research, I thought that Charles Schwab had the best deal going.

So that should bring us up to speed. Since my last post, I’ve had a course correction. I was all set to sign up with Charles Schwab (had the application filled out and everything), but then a little birdy whispered “Fidelity” in my ear, so I went to check out what that mutual-fund and brokerage company was offering.

Turns out they were offering almost the exact same thing. Except the interest rate on their checking account was 3.5%. Schwab’s is 4%. Game over, you would think.

Not so fast. Thanks to a discussion thread I found at FatWallet, it turns out there’s a cool little workaround you can do with Fidelity’s checking account (called “MySmartCash“). This trick will not only earn you more than Fidelity’s own 3.5%, but also more than Schwab’s 4%. All you have to do is open a MySmartCash account, then link it to one of Fidelity’s money-market funds, which acts as sort of a linked savings account. You’ll end up keeping most of your money in the money-market fund most of the time.

Money-market funds often earn a higher interest rate than a simple checking account or a bank’s money-market account, but they are not FDIC insured in the event of a bank failure. That may worry some people, but money-market funds only invest in extremely high-quality debt and only for short periods of time, insulating the fund from wild market swings.

In addition, The Wall Street Journal reported on Saturday that, even in the event of a severe credit crisis, “fund companies would almost certainly take steps to prevent losses from reaching shareholders — such as absorbing the losses themselves by purchasing the money-losing securities from the fund at their full price.”

Ok so, basically, no one’s putting their cash at risk in a money-market fund.

Both Schwab and Fidelity offer money funds, but Schwab’s funds tend to have higher minimums (like $25,000). Fidelity’s minimums are lower in many cases, around $2,000. By opening a checking account with Fidelity, I get all the services and ATM reimbursement fees I want; by putting my money in a money-market fund instead of the standard checking account, I can earn 5% on my cash instead of 3.5% or 4%.

But you have to keep some money in your checking account, right? How else to get access to your cash? Well, once I link the money fund to the checking account, Fidelity will automatically cover any overdrafts from my checking account with the cash in the money fund. There’s no fee for this, nor do I pay any interest. It just happens.

I could actually keep nothing at all in the MySmartCash account and sock all my money into Fidelity’s Cash Reserves money fund. Whenever I go to the ATM or use my debit card or write a check, Fidelity will first go to the checking account, see that nothing’s there, then go to the money fund and automatically sell shares (in increments of $250) to cover any transaction. Again, I wouldn’t pay any transaction fees for selling the shares.

I was impressed with this strategy, and the people on FatWallet generally know what they’re talking about, but it did seem a little, how you say, unkosher? I mean, in theory Fidelity probably wants you to keep money in the MySmartCash account–after all, why else would they offer it?–but they also hadn’t done anything to prevent me or anyone else from making the kind of arrangement I described.

So I called Adam Banker at Fidelity’s press office to ask him about this. I explained how you could basically turn a money-market fund into a checking account, while still getting all the bells and whistles of the MSC account (free bill pay, ATM reimbursement). I asked if Fidelity was aware of this and, if it wasn’t, if it would allow this practice to continue.

Adam checked with some of his people and, a couple of days later, told me it was a-ok. “We don’t expect that many of our customers will set up accounts as you’ve described,” he said, “but it’s not a problem from our end if they do.”

There could be one problem for me: A pile of tax forms resulting from the dozens of money-market fund transactions I’ll make each year. I’ll have two months in 2007 to test this. If it turns out to be a huge hassle, I might put my money in a tax-free money-market fund (which would cost me a tiny bit in overall interest but spare me the paperwork).

So that settles it. I get all I wanted in an online checking account at a higher interest rate than I thought possible. I sent out my application last week, and I await my start kit. Fidelity wins.

–Sam Grobart