By EMILY MALTBY And ANGUS LOTEN

U.S. government bailouts of General Motors and Chrysler became a constitutional battleground when they were pushed through bankruptcy court in 2009.

Turns out the battle isn’t over just yet.

More than 220 former car dealers are pressing their case that the Obama administration violated the U.S. Constitution when the car makers terminated franchise agreements while in bankruptcy restructuring.

They are seeking compensatory damages ranging from $500,000 to more than $5 million apiece.

Two claims, initially filed in October 2010 and February 2011, cleared the government’s motions to dismiss in February and are now heading into the pre-trial discovery phase. The dealers’ lawyers are seeking government documents that they hope will show that auto makers had to eliminate some dealerships as a condition of receiving funds from the government’s Troubled Asset Relief Program.

The cases are believed to be the first to test the constitutionality of the federal government’s $80 billion bailout of the auto industry under the Bush and Obama administrations.

Supporters say the actions saved hundreds of thousands of jobs, while critics say they artificially propped up two failing companies, however large.

Herb Adcox of Chattanooga, Tenn., says he just wants a fair price for his car lot, which he valued at some $3 million in June 2009, including property and an inventory of 150 vehicles and parts worth $250,000 when GM terminated its relationship with him. Without new GM vehicles to sell, Mr. Adcox turned to selling used cars and repairs. His sales dropped to 25 vehicles a month from more than 100 a month earlier in the year.

“I lost money in 2009,” he said, declining to provide specific dollar losses.

Mr. Adcox is party to one of two lawsuits now winding their way through the U.S. Court of Federal Claims in Washington, D.C. His case is seeking class-action status, and the plaintiff lawyers behind that case say they hope to include the claims of all Chrysler or GM dealerships that were hurt by the rejections.

The plaintiffs say that the Obama administration violated what’s known as the “takings” clause of the Fifth Amendment.

Originally written to protect citizens from uncompensated government seizure, the takings clause has long been invoked to resist government seizure of private property for large infrastructure projects.

The dealers’ claims may be a long shot because government lawyers are expected to argue that the U.S. didn’t take anyone’s property, and it was GM and Chrysler that legally terminated business relationships with these dealers.

The judge warned in February that “the theory under which plaintiffs hope to recover does not fit neatly” into a normal takings-clause case. The government has until Friday to respond to the complaints.

Some of the dealers also were involved in earlier challenges to the car maker’s bankruptcy proceedings. Government lawyers might argue that the lawsuits are essentially a second bite at the apple for those dealers.

The plaintiffs are arguing that the U.S. government’s involvement, loaning taxpayer money and overseeing GM and Chrysler’s restructuring, perverted the natural course of bankruptcy. U.S. Treasury was not just a lender, but a government actor, they say. Leonard Bellavia, a partner at Bellavia Gentile & Associates LLP in Mineola, N.Y., who is representing 125 former Chrysler dealers, aims to show that terminating the dealership contracts was “a condition of receiving funds” from Treasury.

“When the government decides to intervene in the economy and targets industries for whatever reasons, under the Fifth Amendment it must pay compensation for what it takes or destroys,” says Richard Faulkner, partner at Blume, Faulkner, Skeen & Northam, PLLC, Richardson, Texas, who is representing a group of former dealers.

Franchises, such as the Chrysler and GM dealerships, generally don’t face termination by a franchiser because they are protected by state laws. But those state laws were trumped by federal laws when the auto manufacturers filed for bankruptcy. Federal bankruptcy law gives companies wide latitude to reject undesirable contracts. Some dealers attempted to fight their rejections during the bankruptcies but they didn’t prevail.

Carl Tobias, who teaches constitutional law at the University of Richmond, said he sees the case as a difficult one. He said he doesn’t expect the government to settle because “the stakes are too high.” Apart from the cost to even partially reimburse hundreds of closed dealerships, Mr. Tobias says the government “wouldn’t want to have a precedent that this type of action is unconstitutional.”

GM spokesman Greg Martin said of 6,375 GM dealers in the U.S. at the end of 2008, only 57% were profitable. The company has since reduced that number to 4,407, of which 90% are profitable, a level the company hasn’t seen in its dealers since the 1970s, he said. “We’re not looking back,” he added.

“Chrysler Group’s optimized dealer network is contributing to improved vehicle sales and customer service and will continue to be a vital part of the company’s success,” said Michael Palese, a Chrysler spokesman. “Plans to place all of our brands under one roof, in well-located facilities, also have resulted in enhanced dealer profitability, and greater investment by existing dealerships.”

Many who lost their franchises were able to sell for other new-car manufacturers, sell used cars, open muffler shops or rental car agencies. Some say they have been struggling since 2009, even if they were able to keep their doors open by selling used cars.

They claim they fell into debt when they lost profit from the vehicles and parts they had on their lots. Many depended on those profits to cover overhead expenses like their dealership mortgages and payroll.

Jim Koehler, owner of Scotia Motors in Scotia, N.Y., and a plaintiff in the Chrysler suit, said he lost about $2 million when his Dodge franchise, started by his father in 1946, was revoked. Mr. Koehler, 67, now runs a used-car sales and service shop with his wife and daughter, but he says the business is not profitable. “I hope we are all made whole,” he says. “This has been the three worst years of my life.”

Rob Engel, 59, and his brother, Richard owned a Chrysler-Jeep dealership in Tenafly, N.J., and a Chrysler dealership in Wyckoff, N.J. They lost their franchises in 2009. The Wyckoff location also had a wholesale parts warehouse.

He entered into arbitration with Chrysler in 2010. Neither dealership was reinstated even though both were profitable, Mr. Engel says, adding that he never found out why his locations were selected.

Mr. Engel estimates he had more than $1.5 million in parts between the warehouse and the two retail locations. “We cashed out our life insurance policies to sustain mortgage payments on both buildings,” he says.

Today, Mr. Engel has a Kia Motors dealership in Tenafly and is renting the Wyckoff property to an auto body shop.

Dave Smith, 58, president of Colonial Chevrolet Company Inc., in Woodsville, Miss., says that in May 2009, GM offered $7,950 to close operations within 18 months. He refused to sign the agreement and his dealership contract was terminated.

“We’re losing money now,” he says.

New car sales used to account for 65% of annual profits, with the rest coming from parts and repairs. The business today is focused on repairs and a few used car sales, he says.

Write to Emily Maltby at emily.maltby@wsj.com and Angus Loten at angus.loten@wsj.com

A version of this article appeared April 26, 2012, on page B1 in some U.S. editions of The Wall Street Journal, with the headline: Car Dealers Fight On.

By JOHN D. MCKINNON

WASHINGTON—The Supreme Court ruled against the Internal Revenue Service in a tax-shelter case, underscoring the agency’s challenges in rooting out improper tax avoidance.

The IRS waited too long— more than three years—to challenge taxpayers’ filings that used a “Son of BOSS” tax shelter, the court ruled Wednesday. The court’s ruling didn’t address the legality of the tax shelter.

The decision could benefit dozens of taxpayers who used the shelter and cost the government hundreds of millions of dollars in revenue, perhaps as much as $1 billion, lawyers said.

Son of BOSS was a term Treasury officials coined to describe a variety of tax shelters that sought to wipe out taxes on capital gains from the sale of a business or other appreciated asset, for example, by artificially inflating the cost of an asset to make the profit from its sale appear smaller.

All resembled an earlier shelter marketed as “BOSS,” short for “bond and option sales strategy.” The Son of BOSS transaction was marketed in various forms by advisers at some accounting and law firms beginning in the late 1990s. Several thousand taxpayers likely used the shelter before the Treasury and Congress took steps to block its tax benefits, beginning in 2000.

While the IRS and Treasury were moving against Son of BOSS shelters as early as 2000, individual deals could be difficult to detect, and the IRS obtained much of its information through lengthy investigations of promoters. By the time the IRS got around to auditing individual taxpayers, the three-year statute of limitations for assessing back taxes often was running out, lawyers said.

The IRS argued in a number of cases that a six-year statute of limitations should apply. The six-year statute typically applies in cases in which the taxpayer has omitted income.

Many taxpayers ultimately resolved the cases through settlements that allowed them to pay back taxes and some penalties. But other taxpayers fought back in court. They argued that the six-year statute of limitations shouldn’t apply, because Son of BOSS didn’t involve omission of income. In Wednesday’s 5-4 decision, the Supreme Court agreed, saying the IRS overstepped in using the six-year statute of limitations.

The case involved a 1999 sale of a Salisbury, N.C., heating oil and concrete business, Home Concrete & Supply LLC. The transaction totaled about $10.6 million, according to court records. But the tax shelter enabled the partnership holding the oil business to report a gain of just $69,000 from the sale.

The business was advised on the tax shelter by Jenkens & Gilchrist LP, a Texas law firm that eventually shut down after an IRS investigation into its tax-shelter practice.

The two taxpayers who used the shelter, Robert L. Pierce and Stephen R. Chandler, were “very pleased” by the court’s ruling, said lawyer Mark Wiley of Womble Carlyle in Winston-Salem, N.C. “They’ve been fighting this one a long time,” Mr. Wiley said. “They felt they had done what they were supposed to do; they contacted tax professionals to help” and obtained favorable opinion letters from lawyers. The decision reinforces the standard three-year statute of limitations for IRS assessments, Mr. Wiley said.

The high court’s decision comes on top of other courts’ rejections of regulations that were designed to help the government pursue Son of BOSS cases.

“This was their second effort at trying to find a way to capture taxpayers retroactively that they now have lost,” said Mark Allison, a lawyer with Caplin & Drysdale. “The broader point is…that the IRS has found itself limited in what it can do retroactively.”

Write to John D. McKinnon at john.mckinnon@wsj.com

A version of this article appeared April 26, 2012, on page C3 in some U.S. editions of The Wall Street Journal, with the headline: Tax-Shelter Case Goes Against IRS.

By RACHEL LOUISE ENSIGN

Fund investors can go wrong in all sorts of ways. But since mid-April is fast approaching, let’s talk about one of the most common and least understood: taxes.

Even if it is too late to do anything about this year’s returns, it is a good time to start planning for next year’s.

At the root of the most common blunders are three types of taxable fund payouts: interest income, dividends and capital gains. While all three are subject to a complex web of tax rates and regulations, investors can limit their tax bills by understanding their funds, planning carefully and staying abreast of tax changes in Washington.

Here, according to financial advisers, are five of the biggest mistakes many fund investors make:

1. Keeping ‘tax-inefficient’ funds in a taxable brokerage account

Some types of funds distribute lots of dividends, interest income and capital gains, all of which can boost tax bills. Many investors would be better off holding those funds in tax-sheltered retirement accounts. With a standard 401(k) plan or individual retirement account, you pay tax only when you make withdrawals; earnings and withdrawals usually are tax-free in a Roth 401(k) or Roth IRA.

Tax-efficient funds—those unlikely to make big distributions—can be left in a taxable account, says Michael Gibney, a financial adviser in Riverdale, N.J. You will owe capital-gains tax if you sell those securities at a gain, but at least the timing of such sales is under your control.

Financial adviser Ken Weingarten talks with WSJ’s Rachel Ensign about the tax uncertainties facing investors as they look ahead to 2013.

Taxable-bond funds, including high-yield funds and funds holding Treasury inflation-protected securities, are among the investments you might consider holding in an IRA, advisers say. Ditto for funds that emphasize high-dividend stocks. Meanwhile, index funds that track a broad stock-market benchmark—and most but not all ETFs—might be candidates for a taxable account, as would municipal bond funds, since interest earned is tax-free.

Determining whether a fund is going to have capital gains can be tricky. Each year, funds must distribute gains if portfolio managers sell securities for a net taxable gain. One indicator is the level of turnover in the portfolio, though, admittedly, it is an imprecise gauge.

The higher a fund’s turnover, a figure that can be found on Morningstar.com, the more likely it is to pay out capital gains, says Mark Armbruster, president of Armbruster Capital Management, which is in the Rochester, N.Y., area. If a fund has paid out capital gains in the past, something that also can be found on Morningstar, that also is a sign it may do so again, he says.

Small-stock funds may produce more capital gains than large-stock funds, advisers say, because there are many more small stocks to trade among.

Broad index funds, which don’t change their holdings very often, are less likely to pay out capital gains than some actively managed funds that change their investments based on market conditions. The Vanguard 500 Index

fund, for example, has a 4% turnover ratio and hasn’t distributed capital gains since 1999. The actively managed CGM Focus,

on the other hand, has a nearly 500% turnover rate. It has performed poorly in recent years, so it hasn’t been in a position to distribute gains, but it distributed $8.21 a share in mostly short-term capital gains in 2007.

Still, when and why a fund realizes capital gains is complex, so “turnover is only a very rough gauge of tax efficiency,” says Christine Benz, director of personal finance at Morningstar. Another gauge is Morningstar’s “potential capital-gains exposure” statistic, an estimate of the percentage of a fund’s assets that represent mostly unrealized gains.

ETFs, in particular, rarely distribute capital gains, Mr. Armbruster says. That is because most are index funds but also because they are structured to minimize taxable sales of portfolio securities.

2. Holding on to funds that cost you big

Capital gains, whether taken on purpose by the investor or passed along by a fund, can add to your tax bill. But you can lessen their impact by strategically booking capital losses when holdings decline in value, so that they offset any gains dollar for dollar. In any year, if your capital losses exceed your capital gains, you can take up to $3,000 of the loss as a tax deduction and carry the rest of the loss forward to offset gains in future years.

This “tax-loss harvesting” has to be done carefully, however, to comply with Internal Revenue Service rules. Once you sell a fund or other security at a loss, you have to wait 30 days before buying either that same fund or a very similar fund (for instance, one that tracks the same index), or the loss is invalidated. “The securities cannot be ‘substantially identical,’ ” says Gil Charney, principal tax researcher at the Tax Institute at H&R Block, a division of H&R Block Inc., but “the IRS never clearly defined what substantially identical means.… It’s gray.”

If you want to keep exposure to the sector that fund covered, you can buy a slightly different fund—for instance, you likely could sell a fund tracking the Standard & Poor’s 500-stock index and immediately buy one tracking the Russell 1000, says Mr. Armbruster. You could later return to your original holding.

Keep tax-loss harvesting in mind any time the market or a particular holding suffers a major decline; you’ll miss opportunities if you think about this only near year-end.

3. Buying an ETF without learning what its tax treatment is

Gains and income from certain ETFs are subject to funky tax rules because of the funds’ holdings or their corporate structures. Though most of these aberrations invest in niche industries, some of the most popular ETFs could leave you with a surprisingly large tax bill.

The most popular offender: Gains from selling SPDR Gold Shares,

the second-largest exchange-traded product by assets, are taxed at a top 28% rate on collectibles, rather than the maximum 15% rate on long-term capital gains. That is true for all other funds that hold physical precious metals.

There are different rules for ETFs that provide commodities exposure by investing in futures contracts: Gains are taxed 60% at a long-term rate and 40% at a short-term rate. ETFs structured this way include some from the U.S. Commodity, PowerShares and ProShares families.

Also, some non-stock ETFs are structured as partnerships and report their tax information on a Schedule K-1 instead of the common 1099 form. Schedule K-1 typically is sent later than a 1099—it may not even arrive before your tax return is due because the partnership has to file its own return before sending you this form, says Eric Smith, an IRS spokesman. In this situation, you’ll want to ask for an extension from the IRS, he says. You can avoid these hassles by holding these funds in an IRA.

4. Fudging the new forms

Reporting securities sales on your tax return has gotten more complex, with new rules that require brokerage firms and fund companies to report to the IRS what you paid for some securities you sell. Because that reporting applies only to securities purchased after specified dates, you may have sales of both “covered” and non-covered assets. As in the past, for non-covered securities, the financial firm may voluntarily provide cost information only to you.

The new rules could make tax preparation more complex, tripping up some investors.

“Basically what they’ve done is taken Schedule D and added a new schedule behind it—Form 8949. All the transactions you used to put directly on Schedule D…are now on this new form,” says Robert Schmansky, a financial adviser in Bloomfield Hills, Mich.

The most important thing to know about Form 8949 is that you will have to separate the covered transactions from those that aren’t and report them on different lines. Individual stocks purchased on or after Jan. 1, 2011, are covered; for mutual funds and most ETFs, the new treatment applies to purchases on or after Jan. 1, 2012. Then, you must add the covered and non-covered transactions and put the total on Schedule D.

5. Investing without paying attention to the tax debate in Washington

When deciding when to take gains and what account to hold various funds in, it is important to stay abreast of what is going on in Washington.

Think hard about where tax rates are likely headed in the future. While some tax changes affecting funds are already in store, some experts watching the political debate—and the ballooning federal deficit—say investors may want to hedge their bets against higher rates and pay taxes on their gains soon.

There are a number of big tax changes on tap starting in 2013 that could deal a huge blow to your funds. If the Bush tax cuts are allowed to expire, the top rate on ordinary income and short-term capital gains will rise to 39.6% from 35%.

The current top 15% rate on long-term capital gains is set to rise to 20%. Qualified dividends will no longer be taxed at a top 15% rate and will be taxed as ordinary income. Also, net investment income, which includes dividends, interest and capital gains, will be subject to a new 3.8% Medicare tax, part of the Affordable Care Act, for married couples filing jointly who earn more than $250,000 a year and individuals earning more than $200,000 a year.

One possibility is that some of the current rates will be extended for most taxpayers, but not for high earners. “People who are over the $250,000 mark—Obama has drawn a line in the sand for those people,” says Ken Weingarten, a financial adviser in Lawrenceville, N.J. “It’s going to be crazy after the election. There is going to be a lot of horse trading to get these things straightened out.”

If you think that your tax rate on capital gains will rise soon, you may want to book a capital gain this year to lock in the 15% rate. Unlike with a capital loss, if you’re booking a gain you can repurchase the same exact fund in any quantity immediately after selling it.

Ms. Ensign is a staff reporter for The Wall Street Journal in New York. She can be reached at rachel.ensign@wsj.com.

A version of this article appeared April 5, 2012, on page C7 in some U.S. editions of The Wall Street Journal, with the headline: Tax Pitfalls for Fund Investors.

By DAISY MAXEY

It’s a xenophobic fact of life for many financial advisers: They believe their clients need to put at least some of their money overseas. But many investors don’t feel comfortable venturing any farther than, say, New York or California.

What’s an adviser to do?

It isn’t easy, as advisers often run into solid walls built of patriotism, chauvinism, ignorance or apathy. But they feel they have no choice.

“To help meet retirement needs, you’re going to have to generate income above inflation, and you’re not going to be able to do that just using fixed income in the U.S.,” says Brian Levitt, chief economist at OppenheimerFunds.

The obstacles, though, are many. For starters, says John Longo, chief investment officer at MDE Group, a wealth-management firm in Morristown, N.J., a lack of information and fear of the unknown often keeps clients from investing overseas.

Mr. Longo says he spends a lot of time educating investors on how diversifying across various geographic markets actually can reduce risk. Most will warm to the idea of at least a diversified portfolio of international or emerging-market exchange-traded funds, he says.

A key part of winning over stay-at-home investors is simply education. Mr. Levitt, for instance, suggests telling stories about companies based in emerging markets, Europe and Asia that are creating value. In particular, pointing out successes of familiar foreign brands helps convey the message that investing abroad doesn’t have to be as exotic or as risky as the customers sometimes believe, Mr. Levitt says.

So he advises telling clients how luxury brands like LVMH Moët Hennessy Louis Vuitton

are hiring Mandarin-speaking employees in their shops along the Champs-Elysées, or how London’s SABMiller

PLC is bringing beer to Russia.

In addition, while the U.S. now accounts for one-third of world growth in real terms, it will account for just one-fifth by 2030, Mr. Levitt says. “This is not post-World War II America,” he says.

Over the past 10 years, investors have begun to increase their international exposure, says Tony Montanari, senior vice president at Capital Guardian Wealth Management in Charlotte, N.C. Still, Mr. Montanari says he still often sees new clients who have no exposure or very little to emerging markets, international fixed income and international real-estate investment trusts.

“Everybody’s been talking about a global economy for so long, but still so many people aren’t broadly diversifying their portfolios to emerging markets, international bonds and just international in general,” he says.

Sometimes clients don’t realize that U.S. companies aren’t the only key players on the world stage, says Mark Balasa, co-chief executive of Balasa Dinverno Foltz LLC, a registered investment adviser in Itasca, Ill. Mr. Balasa says his clients have about one-third of their assets in foreign investments and he expects to increase that to about 40% within the next year or so. But it’s not uncommon for investors to walk in the door with just 10%, 5%, or even none of their portfolio in foreign investments, he says.

Many advisers recommend that cautious investors begin by just dipping their toes into foreign waters.

Michael Garry, managing member and chief compliance officer of Yardley Wealth Management in Newtown, Pa., says investors who have been putting together their own portfolios often have no international investments—at most one international fund or a foreign stock or two. “It’s nothing near the weight an adviser would recommend,” he says. He’ll start such investors with a basic approach, he says, using mutual funds or ETFs that invest internationally without overweighting particular sectors or countries.

Another conservative approach is to boost a client’s investments in U.S.-based companies that do a lot of business abroad. Mr. Longo, the chief investment officer at MDE Group, says he will point to Coca-Cola Co.

and some U.S.-based technology firms that earn the bulk of their profits overseas. Says Mr. Longo: “I’ll tell a client, ‘Hey, you like Coca-Cola; 80% of their revenue is not from the U.S.’ “

The good news for advisers is that reluctance to invest overseas is not as firm as it was just a decade ago. In the 1990s it was much more difficult to get investors to invest outside the U.S., according to Ron Carson, chief executive of Carson Wealth Management Group in Omaha, Neb. “The U.S. was providing very strong returns,” he says. In addition, some of Mr. Carson’s clients had very strong biases against owning anything related to Japan because of experiences in World War II, he says. Others would recount what had happened to their fathers in Germany and refuse to own any investment connected to Germany.

Investors would permit Mr. Carson to put them in an international portfolio, he says. But anytime that portfolio declined, he says, “they were less forgiving of it.”

Ben Leyhew, an adviser and insurance agent at Financial Services & Solutions Inc. in Murfreesboro, Tenn., says he sees a U.S. bias more often among older and more provincial retail investors. Some of his clients still flat out refuse to invest overseas, he says. Some are veterans who don’t want to invest in countries where they fought. “I typically thank them for their service and keep them in domestic names,” he says.

Others don’t trust foreign governments, like China’s, for example. Mr. Leyhew, who lived in Shanghai for five years when his father worked there for General Motors Corp.,

says he can sometimes overcome clients’ reluctance about China when he explains the total amount of investment going on there by multinational corporations. Investors sometimes feel more comfortable investing when they know that major corporations are willing to commit assets to these foreign businesses, Mr. Leyhew says.

Investors’ faith in foreign markets has been tested by the euro-zone crisis. Earl Winthrop, an adviser with Winthrop Wealth Management in Hartford, Conn., says he tries to forestall client worries by recommending companies with large global footprints. In Europe, Mr. Winthrop says, he focuses on companies like Germany’s Bayer AG, a global health-care, nutrition and materials company; Anheuser-Busch InBev NV,

a Belgium-based multinational beverage company; and Roche Holding AG, a Switzerland-based health-care company.

“They may be worried about Europe,” he says of his clients. “But there may be companies based in Europe that are getting most of their revenues elsewhere.”

Ms. Maxey is a special writer for Dow Jones Newswires in New York. She can be reached at daisy.maxey@dowjones.com.

A version of this article appeared April 30, 2012, on page R5 in some U.S. editions of The Wall Street Journal, with the headline: U.S.A., U.S.A., U.S.A.!.

By KIRSTEN GRIND

Brokerage and mutual-fund firms, preying on customers’ frustration with big banks, are rolling out new banking services—and hyping existing ones—to grab market share.

In an era of low interest rates and vanishing perks, some of the new offerings might be worth a look, experts say.

Jeff Mangiat

Brokerage TD Ameritrade

late last year introduced online bill pay and ATM rebates, while money manager TIAA-CREF in February unveiled a lineup of banking services, including free checking accounts and a high-yield savings account paying 1.25% annually through its new Internet bank TIAA Direct.

Charles Schwab,

meanwhile, says it is boosting efforts to sell no-fee checking accounts and other services to brokerage clients. Paul Woolway, president of Charles Schwab Bank, says the firm’s goal is to be the bank of choice for customers who already invest with Schwab, although anyone is eligible to bank there.

Fidelity Investments is pushing its Fidelity Cash Management Account through print, Internet and television ads. The account, which has no minimum-balance requirement, offers free checking, online bill pay and reimbursed ATM fees, says Jim Burton, president of Fidelity’s retail brokerage business. Unlike Schwab Bank, which is owned and operated by Schwab and receives full Federal Deposit Insurance Corp. protection, Fidelity keeps its deposits at traditional banks to get FDIC protection.

The firms’ efforts seem to be paying off. Fidelity saw a 40% increase last year in the number of Fidelity Cash Management Accounts, according to the company. Schwab’s bank deposits increased about 20% to $61 billion in 2011, according to Kapstone Consultants, a New Jersey-based bank consultancy that analyzed FDIC data at the request of The Wall Street Journal.

All told, deposits at 10 banks run by brokerages, including Schwab Bank, T. Rowe Price Savings Bank and Scottrade Bank, jumped 16% in 2011 to $263 billion, according to Kapstone.

Some deals offered by brokerages stack up well against those offered by traditional banks, say financial advisers.

The Fidelity Cash Management Account, for example, has few restrictions. Customers don’t pay a fee and there is no minimum balance. The company reimburses ATM fees and rewards customers for higher deposit levels through free trades, Apple gift cards and airline miles. By comparison, Bank of America‘s

full-service checking account will waive the monthly fee of $12 only if customers make a direct deposit of $250 or more each statement period or keep an average balance of $1,500, according to the bank’s website.

Still, the offers vary. Interest rates on checking accounts at many brokerages range from 0.05% to 0.10%, the same as at many stand-alone banks, according to researcher DepositAccounts.com.

Customers also should be aware that changing banks can be an arduous process for people who use automated bill-pay and other services. What’s more, most of the brokerage-based banks are Internet-only, with no physical branches. And brokers’ high initial rates might change down the line, experts say.

TIAA-CREF’s new savings account pays 1.24% a year, the highest of those tracked by DepositAccounts.com. But “the rate is very likely to go down to be more in line with online savings accounts,” says Ken Tumin, co-founder of DepositAccounts.com. A spokesman for TIAA-CREF says the rate isn’t promotional.

The best approach for people opening a new account might be to keep their existing account as well, so that their automated bill pay and other services aren’t interrupted. That way, if the brokerage’s sweet deal goes away, they can simply roll the money back into their old bank account.

J. David Lewis, the president and founder of financial adviser Resource Advisory Services in Knoxville, Tenn., recently sent in an application to open a checking account at Schwab Bank.

While he says he will keep an account at Atlanta-based SunTrust Bank

to avoid the hassle of changing his automatically deducted bills, he is happy to try out the higher-rate account.

“Internet banking has evolved to the point where I almost never need to go into a bank,” he says. “What are those things?”

Write to Kirsten Grind at kirsten.grind@wsj.com

Corrections & Amplifications

Customers with deposits at U.S. banks owned and operated by brokerage firms receive full Federal Deposit Insurance Corp. protection. An earlier version of this article implied that Schwab Bank customers don’t have FDIC protection.

A version of this article appeared May 5, 2012, on page B8 in some U.S. editions of The Wall Street Journal, with the headline: Fund Firms Challenge Banks.