Yesterday's Wall Street Journal contained an article, "Sweep Option Shifts at Unit of Wachovia," which claimed that Wachovia Securities will be converting clients accounts of A.G. Edwards that hold Centennial Money Market Trust, advised by Oppenheimer Funds, into A.G. Edwards bank "sweep" deposits. The Journal, which names no sources, said the conversion will start May 14, and added, "Wachovia's action is an increasingly common tactic. Wall Street firms are channeling more retail brokerage clients' excess cash toward regular bank deposits, which yield lower interest rates, for most clients, than money market funds."
This latest news in the "bankerage," or brokerage banking sector, comes on the heels of other moves by brokerages to squeeze more profit from their beleaguered cash sweep investors. (See our March 26 "Link of the Day" on WSJ's recent "Smith Barney Rolls Out New Client 'Tiers'".) Our Crane Brokerage Sweep Index shows rates declining from 1.30% to 0.61% for brokerage sweeps on $50K to $100K balances over the past 3 months, and shows rates declining from 2.67% to 1.26% on $500K to $1 million balances.
The Journal says, "The net result of the change will be to slash interest rates for less-afluent clients, particularly those with less than $1 million in assets." While A.G. Edwards is among the highest-paying brokerages on cash "sweep" balances, with rates ranging from 1.82% to 2.47%, Wachovia is among the lowest, being the sole major brokerage that refrains from posting its sweep rates publicly.
Crane Data believes that the trend of brokerages sweeping cash to banks has declined and even reversed recently. We estimate that balances have shrunk from approximately $350 to $320 billion over the past year, as the spread between the average brokerage bank account and money market mutual fund averaged over 3%. A number of brokerages are also rethinking their move into "bankerage" following severe losses from mortgages and from the reinvestment of sweep proceeds into asset-backed securities. However, as rates continue their decline, brokers are taking advantage of a renewed "desensitivity" of savers to interest rates.
