CityWire published an article titled, "Schwab sued over Cash Features sweep program," which tells us, "Charles Schwab is facing another cash sweep-related lawsuit from a customer claiming to hold brokerage and retirement accounts with the financial services giant. The suit was filed by California resident Abraham Atachbarian in US District Court for the Southern District of New York. The complaint accuses Schwab of paying an unfairly low interest rate to clients for whom it holds uninvested cash. Atachbarian's legal complaint specifically fingers Schwab Cash Features, a program which includes bank sweep options for both brokerage and retirement account holders." (Note: We're still taking registrations for our "basic training" event, Money Fund University, which is Dec. 19-20 in Providence, R.I!)
The piece explains, "In response to a request for comment on the complaint, a Schwab spokesperson said the company has sought to align its cash management offerings with client goals. 'For managed accounts, we offer a streamlined, hands-off approach where our experts handle the investment decisions, ensuring stability and simplicity,' the spokesperson said. 'For self-directed accounts, we support client autonomy by providing a wide array of options, educational resources, and ensuring security with FDIC insurance. We believe this dual approach offers both comprehensive support and flexibility, enabling clients to manage their cash in a way that best fits their individual financial goals.'"
CityWire's piece explains, "Schwab is one of several Wall Street giants that have faced lawsuits from customers over their cash sweep programs. LPL Financial, Ameriprise Financial Services, Raymond James and others have been hit with court complaints in which customers have made similar claims about fiduciary duty breaches and unjust enrichment. Schwab itself faced a lawsuit over its cash sweep practices about three months ago. That suit claimed the company failed to disclose cash sweep agreements with affiliates of TD Ameritrade, following its 2020 acquisition of TD Ameritrade Holding Corp."
They add, "With interest rates broadly increasing over the last three years, customers have asked the courts to enforce claims that they should earn more on their uninvested cash.... Schwab previously disclosed that it pays customers an annual yield of 0.45% on uninvested cash in brokerage accounts, a rate that Atachbarian cited in his lawsuit. As benchmarks for a potentially fairer rate, Atachbarian's complaint cited the higher cash sweep rates of 2-5% paid by some competitors, as well as the rates of at least 4.88% that Schwab's money market funds were offering as of September."
For more on lawsuits over brokerage sweeps, see these Crane Data News stories: "Wells Quiet on Sweeps on Q3 Call" (10/18/24), "Barron's Writes on Brokerage Sweep Woes; Reuters on Rate Cuts, MMFs" (9/23/24), "Alight Money Fund Liquidates; Bloomberg Law on Brokerage Sweep Suits" (9/19/24), "Sept. MFI: Sticking with Prime Inst; MMFs Hit Record; Sweeps Scrutiny" (9/9/24), "Barron's: JPMorgan Sued on Sweeps" (8/29/24), "More on SEC Sweeps Scrutiny; Inv News on Sweeps, UBS's Earnings Call" (8/20/24), "Law Firm Says Bolster Disclosures, Rates on Sweeps; Crane Index 5.11%" (8/13/24), "Barron's: BofA Cites Risk from Sweeps" (8/8/24), "Central Bank of Ireland on Fund Regulations; Brokerage Sweeps Lawsuits" (8/5/24), "Tradeweb Completes ICD Acquisition; AdvisorHub on Wells Sweep Suit" (8/2/24) and "IN: Ameriprise Sued Over Sweeps" (7/31/24).
In other news, Reuters posted the brief, "BlackRock sees investor shift from cash after even 'modest' rate cuts." It states, "Investors are expected to increase their allocations to stocks and bonds from cash after even 'modest' Federal Reserve interest rate cuts, BlackRock's chief financial officer said on Tuesday. Lower interest rates are expected to eventually pull yields in money markets down from well above 4%, which is where cash-like instruments like T-bills currently stand."
Reuters adds, "So far, however, there has been little evidence that investors are abandoning cash. Assets in U.S. money markets stood at $6.77 trillion as of last week, data from the Investment Company Institute showed, up from $6.3 trillion in early September."
According to the Seeking Alpha transcript from the CFO's appearance at the Goldman Sachs 2024 U.S. Financial Services Conference, Small comments, "There's still enough political and economic uncertainty in the world that cash is an attractive safe haven for clients. Market expectations for rate cuts, I think, are kind of shallower and fewer. And then also the terminal rate [is lower] relative to where we would have thought it was going to be a year ago."
He continues, "Then the last thing I'd say is I don't think ... barring another pandemic or a real global catastrophe ... we're going to see ZIRP and large-scale asset purchases and twists anytime soon from central banks. `So the totality of those factors I think have made money market fund balances stickier for sure. There's a tremendous amount of cash sitting in institutional cash funds, 2a-7 funds, lots of cash proxies."
Small comments, "I think that just cash will be a stickier part of client, more normalized client portfolio allocation. But I'd flag two things. The first of which is for investors that track some kind of global blended benchmark, a traditional 60-40 kind of stock and bond benchmark, those investors that are overweigh cash are underperforming. That can only persist so long, and I think that will fuel a healthy amount of re-risking into equities and into the private market. So that fear of missing out, of trailing your benchmark, I think is contributing meaningfully to re-risking. And the second thing is, while there hasn't been this flood of cash coming out of money market funds and fixed income, it is happening, right?"
He adds, "So at BlackRock, ... we're now at $3 trillion of assets in fixed income across the platform. That's been on 9% organic growth, so it's on very healthy organic growth. Bond ETFs and iShares have logged about $120 billion of organic flows through to the year here. We've seen very strong flows broadly across fixed income. So it is not the floodgate that has happened, but `we definitely see more normalized allocations, legging into fixed income."
Finally, Small says, "I think with some modest rate cuts, I think you'll start to see investors begin to normalize those allocations. I would expect that they'll favor kind of corporates over traditional government bonds a little bit more. I expect that we will see a little bit of a more of a skew towards ETFs than traditional active, but if that's a two-thirds, one-third or a 50-50 on a fee rate basis, we are in a great place, I think to capture either of those flows."
