On Friday, ignites published the article, "Rising Rates Give Brokerage Sweep Programs a Run for Their Money," which discusses the yawning rate differential between FDIC-insured sweeps and money market mutual funds. Author Beagan Wilcox writes, "The fatter margins that bank deposits offer pushed many large brokerages to dump money funds as sweep vehicles in favor of bank products. The prolonged period of near-zero interest rates ushered in by the financial crisis only accelerated the trend away from money funds as the default sweep account choice. But as interest rates rise, money funds are regaining appeal, and the amount brokerages must pay out on deposits to retain customers using them is inching up."
The article tells us, "The average bank deposit sweep rate for clients with $100,000 in cash was 22 basis points in July, compared to 11 bps at the beginning of this year and 6 bps in July 2017, according to Crane Data. [Brokerages and banks] have been reluctantly dragging those rates higher and they wouldn't be doing that unless investors were complaining, or they were concerned about regulatory backlash,' says Peter Crane, president and CEO of Crane Data."
It explains, "The gap between yields on bank sweep accounts and those on money funds was grist for a recent piece in The Wall Street Journal, which noted that brokers 'talk constantly these days about acting in your best interest.' But 'pushing you into sweep accounts that are far more lucrative for them than for you seems inconsistent with that noble goal'"
The ignites piece also states, "Morgan Stanley and Schwab are among the firms that have taken steps in the past year to move more client sweep assets out of money funds and into bank deposits.... Earlier this year, Schwab announced plans to eliminate money funds from its sweep options 'over a period of years.' Crane Data first reported the news." (See our August 6 News, "Journal's Zweig Targets Sweeps (Again); Schneider Video on Front End.")
Finally, it adds, "In a July 25 earnings call, Raymond James chief financial officer Jeffrey Julien noted that 'clients are voting with their feet' and opting for alternative cash investments with competitive rates as opposed to sweep funds. Still, he said, 'money market funds aren't really viewed as competition now,' pointing to 2016 reforms and costs associated with them. Julien also called the spreads on cash -- 150 bps in the case of the St. Petersburg-based broker-dealer -- 'somewhat unprecedented.' Those spreads are likely to decline somewhat, but remain higher than the prior 70 bps level, he said. In some cases, brokers are reaching out to customers who they think are more rate-sensitive and offering money fund alternatives, says Fanger."
In related "sweeps" news, BlackRock writes on "How to rev up your idle cash" in a recent blog. Author Martin Small tells us, "Not all cash is created equal: think about those dollars parked in your brokerage account.... Leaving cash in your brokerage account is akin to burning fuel without getting anywhere. It's not productive for you or your long-term investment goals.... Cash is basically a zero-expected return asset class. But the reality is that there's always going to be some cash in your brokerage account. Cash generally comes from deposits you make, proceeds from selling your investments and dividends. And some investors simply prefer having some portion of a portfolio in the safety and surety of cash."
He continues, "Retail brokers look to help you avoid idle cash. They typically place it in some form of interest-bearing program. Pay attention to what your broker does with your cash. When you open a brokerage account, there is usually some default position, or action, for your cash. Some brokers place your cash into money market funds, often their proprietary, in-house funds. This allows the broker to earn fees from your idle cash. Some brokers 'sweep' your cash from the brokerage into a bank, typically a bank they also own (an 'affiliated' bank). These deposits are often insured by the FDIC."
Small explains, "The bank pays you some interest rate on your 'sweep' deposits, and invests your cash into higher-yielding investments (usually bonds). The bank earns a 'spread' on the difference between the rate it pays you on your cash deposits, and the rate it earns on the investments makes using your cash. This is called 'net interest margin' or 'NIM' in industry jargon.... The bank sweep deposit interest rate in one of my accounts, with one of the top three retail brokers, was 0.22% (22 basis points) as of July 31, 2018. Although I tend not to leave idle cash in my account, that means the bank could take my deposits, buy one-year U.S. government bonds and pocket the annualized difference between 2.4% and 0.2%."
He adds, "Earning revenue from your cash is one of the ways brokers make money, even when accounts are otherwise 'free.' There isn't anything inappropriate about this, but you can do a little work and find a better deal. For example, consider the management fee rate on the default-setting money market fund. Is the fee rate competitive? There are ultra-short duration, cash-focused ETFs, like iShares Ultra Short-Term Bond ETF (ICSH), or money market funds that may offer a much lower fee than the broker's affiliated default option."
The blog states, "You can also look at how much the broker's affiliated bank is paying you for the privilege of using your cash deposits. There are ample one-year, FDIC-insured certificates of deposit (CDs) that pay rates of 2.5% available if you wish to maintain more exposure to cash. There are also high-yield savings accounts that pay annual rates of over 1% and permit more frequent, monthly withdrawals versus a locked-up, fixed-term CD. I keep an allocation to cash in case of emergency, and that money isn't in my brokerage account. It's in CDs and a high yield savings account."
Finally, it says, "Small amounts add up to large sums over long periods -- the old penny saved is a penny earned. Idling your cash is a missed opportunity, and spending a few moments maximizing the value of that cash can getting you moving instead of going nowhere."
