Charles Schwab Investment Management has filed to liquidate another Prime MMFs, Schwab Cash Reserves, as it continues to shift brokerage sweep assets from money market funds to bank deposit options. A Prospectus Supplement for Schwab Cash Reserves tells us, "At a meeting held on September 25, 2018, the Board of Trustees of The Charles Schwab Family of Funds (the Trust) approved the liquidation of, and the related Plan of Liquidation for, the Fund." We review the filing, the story by ignites, entitled, "Schwab Cutting Sweep Money Fund Options," and the latest from our Brokerage Sweep Intelligence, below.
Schwab's filing explains, "In accordance with the Plan of Liquidation, the Fund will redeem all of its outstanding shares on or about April 10, 2019 (the Liquidation Date), and distribute the proceeds to the Fund's shareholders in amounts equal to each shareholder's proportionate interest in the net assets of the Fund after the Fund has paid or provided for all of its charges, taxes, expenses and liabilities. It is expected that this distribution will be at a $1.00 net asset value per share. Additionally, the Fund anticipates making a distribution of any net income and realized capital gains of the Fund prior to or on the Liquidation Date, which may be taxable to Fund shareholders."
It states, "As the Fund approaches the Liquidation Date, the Fund will wind up its business and affairs, and will cease investing its assets in accordance with its stated investment strategies. On or before the Liquidation Date, all portfolio holdings of the Fund will be converted to cash or cash equivalents. As a result, the Fund will not be able to achieve its investment objective and will deviate from its investment strategies during the period as it approaches the Liquidation Date."
Schwab adds, "The Fund's investment adviser will bear all expenses associated with the liquidation other than transaction costs associated with winding down the Fund’s portfolio and effective February 15, 2019 through the Liquidation Date, the Fund's investment adviser will waive the Fund's management fees. The liquidation is not expected to be a taxable event for the Fund."
The ignites piece, "Exit That Way: Schwab Cutting Sweep Money Fund Options to One," states, "In the latest stage of Schwab's effort to steer brokerage sweep assets away from money funds, the firm is showing more investors in such products the door. The firm plans to liquidate its $7.7 billion Cash Reserves fund in April, according to a recent regulatory filing.... The San Francisco–based shop also plans to eliminate the sweep share classes of six other money funds, a separate regulatory filing shows."
It tell us, "When these changes take effect next spring, Schwab brokerage customers will be left with one money fund option: the sweep share class of its $22.3 billion Schwab Government Money Fund. Schwab is far from alone in forcefully nudging clients out of sweep money funds and into bank products, which tend to be more lucrative for brokerages and are FDIC insured. Merrill Lynch last month stopped sweeping customer cash into money market funds in favor of deposits at affiliated banks.... Morgan Stanley also has taken steps in the past year to limit the customer assets being swept into money funds."
They add, "Brokerages have been 'relentlessly' tweaking the rates they pay on bank sweep accounts for different tiers of clients because they're trying to strike a delicate balance between making money off of brokerage clients and 'appeasing people' who know that rates on cash are no longer negligible, says Pete Crane, president and CEO of Crane Data. 'Brokerage revenue streams are under siege,' says ... Crane. '[S]weep accounts are one of the last vestiges that haven't been dragged into the fee wars,' he says. But Main Street investors may start paying closer attention to this area."
Crane Data's latest Brokerage Sweep Intelligence shows that rates among the $1 trillion in FDIC-insured cash held at brokerages moved higher in the latest week, rising to 0.24% (for accounts of $100K-$249K) from 0.22% the week prior, up from 0.11% at the start of the year, and up from 0.07% a year ago.
Several brokerages, including Ameriprise, Fidelity, and Schwab, increased rates on selected sweep tiers in the latest week. Fidelity raised sweep rates to 0.31% (from 0.25%) for accounts less than $100K to 0.66% (from 0.53%) for accounts at $100K and higher. Schwab bumped up rates to 0.30% (from 0.22%) for all tiers under $1 million and to 0.60% (from 0.52%) at $1 million or higher on its Bank Sweep. We expect sweep rates to continue inching higher in coming weeks, pulled higher by money fund yields which will soon approach 2.0% on average. (Let us know if you'd like to see a copy of our most recent Brokerage Sweep Intelligence report.)
For more on brokerage sweeps, see these Crane Data News stories: More Insured Brokerage Sweeps Blowback: ignites, BlackRock Comment (8/21/18), Journal's Zweig Targets Sweeps (Again); Schneider Video on Front End (8/6/18), NY Post on Schwab Sweep Letter(9/11/18), Schwab Changes Brokerage Cash Sweep, Adds Bank, Cuts Money Funds (2/16/18), Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump (1/4/18), Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage (10/12/17), Signs of Life in FDIC Brokerage Sweeps; StoneCastle on Sweep Platforms (5/9/17), Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes (8/15/16), and UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund (6/29/16).
In other news, Investment News writes, "Cash comes into focus as interest rates continue ascent. Subtitled, "Yields on money market funds, short-term CDs and other cash accounts have risen as the Fed continues to raise interest rates, and this has big implications for advisers," it says, "Cash, an asset class that's been in the doldrums for the better part of a decade, is beginning to show signs of life."
They explain, "The Federal Reserve cut its benchmark interest rate to near zero a decade ago in an effort to stoke the American economy in the midst of the financial crisis. A byproduct of that strategy was a severe drop in yields on cash and cash-equivalent accounts, such as bank savings accounts, money market mutual funds and short-term certificates of deposit. But the yield on cash is inching up from rock-bottom rates as the Fed reverses course. Financial advisers are taking notice and monitoring opportunities for higher client returns."
The article continues, "Money market fund returns help demonstrate the pain clients in cash accounts have felt for years. Prime and government money funds were yielding 4.47% and 3.58%, respectively, at the end of 2007, according to the Investment Company Institute. Two years later, those yields had plunged to 0.04% and 0.01%. However, money market rates began inching up noticeably in 2016. Prime funds now yield 1.78% and government funds 1.54%, according to ICI [sic]."
It adds, "The story is similar for other instruments, such as certificates of deposit. Yields on one-year CDs, which bottomed out at 0.22% five years ago, average 0.77% now, according to Bankrate.com data, but some institutions are offering returns as high as 2.5%. The yield on money market deposit accounts, a type of federally insured bank account, have more than doubled -- albeit to the still-meager yield of 0.20%, according to Bankrate.com."
