Barron's writes "Some Financial Giants Pay Paltry Rates on Investors' Cash. Where to Put Your Money." The article tells us, "Last week, Wells Fargo's CFO said the bank's wealth management unit had raised the interest rate it pays on some clients' uninvested cash to more closely align with money-market funds. Investors may be asking why it took so long. Wealth management firms such as Wells Fargo, Charles Schwab, Morgan Stanley, and LPL Financial have been placing customers' uninvested cash in so-called sweep accounts that pay trifling amounts of interest at a time when prevailing short-term rates are near 5%.... This common industry practice can be very profitable for companies, less so for customers. It's now under intense pressure as legal and regulatory scrutiny increases." (Note: Thank you to those who attended and supported our European Money Fund Symposium in London last week! Mark your calendars for next year's show, which will be Sept. 25-26 in Dublin and watch for coverage of the event in our October Money Fund Intelligence.)
It explains, "Investors have recently filed lawsuits accusing companies of breach of fiduciary duty and are seeking class-action status and monetary damages. Whether they succeed depends on the fine print of account agreements as well the specific regulations and legal requirements that apply to the firm and the financial advisor. With about a dozen lawsuits filed against seven companies, plaintiffs' lawyers are piling onto the bandwagon. The Securities and Exchange Commission is also looking into cash sweep practices at several of these companies, according to regulatory disclosures. Morgan Stanley and Wells Fargo recently boosted some rates they pay on client cash."
Barron's writes, "The banks involved have either denied the allegations, declined to comment, or didn't respond to requests for comment. But investors shouldn't wait for a resolution in court to ensure that their idle dollars are working for their benefit. There are more profitable places to park uninvested cash, from money-market funds to high-yield savings accounts. Investors can also consider switching brokerage firms to one that offers better default options than a low-paying sweep account."
They state, "Although cash sorting has abated this year, wealth management stocks have struggled since the investor lawsuits hit, and some companies said they would raise rates paid on client cash. That prompted concern among analysts that pricing pressures could dent earnings. Wells Fargo, for instance, disclosed that its increase in cash sweep interest is expected to reduce net interest income by about $350 million this year. And UBS said in August that it anticipated increases to sweep deposit rates later this year to reduce pretax profits by around $50 million annually."
Barron's comments, "When it comes to client cash, what matters isn't just the rate, but the type of account the client holds. Advisory and brokerage accounts are held to different, but similar, regulatory standards: a fiduciary one and Regulation Best Interest, respectively. Both standards require firms to act in clients' best interests, but when their obligations kick in is different."
Finally, they add, "The courtroom battles will take time to play out, and so far none has been awarded class-action status. Meantime, investors should monitor the interest they are earning on their cash balances. Some investors need to keep cash on hand to pay bills or act quickly when investing opportunities arise. But don't keep more money in a low-paying sweep account than needed. And if you can switch to a different default option, consider doing so. Money-market funds, high-yield savings accounts, certificates of deposits, and short-term Treasuries all offer competitive rates at the moment. These rates are likely to slip as the Federal Reserve cuts rates, but they'll still remain far above the low sweep rates for the foreseeable future."
For more on recent Brokerage Sweep News, see these CraneData.com stories: "Sept. MFI: Sticking with Prime Inst; MMFs Hit Record; Sweeps Scrutiny" (9/9/24), "Law Firm Says Bolster Disclosures, Rates on Sweeps" (8/13/24), "Barron's: BofA Cites Risk from Sweeps" (8/8/24), "AdvisorHub on Wells Sweep Suit" (8/2/24), "IN: Ameriprise Sued Over Sweeps (7/31/24), "Federated Hermes' Donahue, Cunningham Call Hits Sweeps, Flows, Rates" (7/29/24), "Ameriprise, Raymond James Discuss Sweeps Issues on Earnings Call Q&As" (7/26/24), "Barron's Writes on Pressure on Sweeps" (7/25/24), "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures" (7/19/24), "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues" (7/17/24).
In other news, Reuters writes "Fed jumbo rate cut puts pressure on money market fund investors." The piece says, "Investment advisers are urging clients to dump hefty cash allocations now that the Federal Reserve has begun its much-anticipated interest-rate easing, a process they expect to limit the appeal of money-market funds in the coming months."
It continues, "Retail investors' assets in money market funds have grown by $951 billion since 2022, when the Fed started its rate-hiking cycle to tame inflation, according to the Investment Company Institute, which represents investment funds. Their assets stood at $2.6 trillion on Sept. 18, roughly 80% higher than at the beginning of 2022. Total money market assets stood at $6.3 trillion."
The brief also states, "It could take a while for initial reactions to the Fed's decision on Wednesday to show up in money-market fund flows, as it has been tough to persuade retail investors to abandon their cash holdings, analysts note. Assets in money market funds tend to peak nine months after the first rate cut, BofA Securities said in a report."
See also Yahoo Finance's "`Why I'm not doing anything to cope with lower interest rates," which asks, "How should a retail investor deal with Wednesday's interest rate cut by the Federal Reserve and with the future rate cuts that seem to be on the horizon? What I plan to do is nothing. Which may be what you should do too. How can I say 'do nothing' when the airwaves, print media, and the internet are filled with advice and suggestions -- and warnings -- about how to handle the Fed's rate cut?"
