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Demand Notes. From GMAC to Ally to you. Now what?

Throughout my career as a financial advisor in the Metro Detroit area, I’ve had the opportunity to work with a number of people in the automotive industry. Quite a few who worked at General Motors owned GMAC Demand Notes.

The program paid a higher interest rate than banks and it offered the convenience of being able to write checks against the account. It appeared to be a good program, but I always offered my clients a caveat. Although it functioned like a bank, it wasn’t a bank, and money on deposit was not covered by FDIC insurance.

During the turbulent years when GM was trying to avoid bankruptcy, the GMAC Demand Notes were rebranded to Ally Financial and opened up to people outside of GM. And that created a bit of confusion.

Ally Bank is an FDIC insured bank, but the Ally Demand Notes are not considered bank deposits. You could debate the advantages and disadvantages of the Demand Notes vs. cash deposits, but it no longer matters.

Owners of the Ally Demand Notes have received notice from Ally encouraging them to close their accounts. If customers don’t reach out to Ally, their accounts will automatically be cashed out and closed at the end of March.

I bring this up because there are probably many readers in our area that have to deal with this situation. The decision they have to make is what to do with the money from the redeemed Demand Note account. And it basically boils down to whether you’re a saver or an investor.

Last year was the poster child for why it’s so important to have a safe, liquid cash reserve. If you viewed the money in Ally Demand Notes as an emergency fund and want to maintain it as such, I suggest you put the money into an FDIC insured bank.

Yes, the bank interest rate will be significantly lower than the Demand Notes, but the reality is we’re in a low interest rate environment. More important is that your deposit is insured and readily available.

If your redeemed funds go anywhere other than a bank, you’re an investor. That means you’re willing to shoulder an element of risk. And you need to understand that no matter where you decide to invest, there is risk. It’s important to recognize that, no matter how conservative an investment may appear, the principal is still susceptible to fluctuation. It could definitely decrease.

Some years ago, for example, I had a client that couldn’t understand why his previously purchased and presumed safe U.S. Government bond fund dropped in value. When he bought it, he was told that the yield was higher than what bank deposits offered.

I had to explain that bond interest rates might be higher, but when bond interest rates go up, the principal goes down. It’s simple arithmetic. And at the time, we were in an economic cycle when interest rates were on the rise everywhere. Consequently, the price of bonds naturally headed downward.

The bottom line is, even with so-called “safe” investments, principal can and often does fluctuate. If you’re among those that haven’t yet redeemed your Ally Demand Notes, you have a decision to make. Will you be a saver or an investor? March 31 isn’t far off.

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E-mail your questions to kenmorris@lifetimeplanning.com 

Ken is a registered representative of LPL Financial. Securities and financial planning offered through LPL, a Registered Investment Advisor, member FINRA/SIPC. Ken is Vice-President of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.