Barron's Clarifies Fidelity Sweep Push
In yet more news on Fidelity's announcement of higher brokerage sweep rates, Barron's writes, "Fidelity Is Giving Customers Higher Rates on Cash. Here’s Why." They explain (more clearly than previous articles and much better than Fidelity's unwieldy press release), "Yields on cash and money-market funds have fallen lately as the Federal Reserve cut interest rates. But Fidelity appears to be bucking the trend, at least temporarily. Fidelity caused a stir on Wednesday with an announcement that the firm 'has challenged conventional industry practices' by automatically defaulting brokerage customers into a government money-market fund yielding 1.9%. Fidelity didn't actually reveal anything new with the announcement (triggering some angry responses from advisors on Twitter). The firm has defaulted nonretirement accounts into Fidelity Government Money-Market fund (ticker: SPAXX) since the third quarter of 2015. New retail retirement accounts made the switch in May, 2019. Advisors who custody with Fidelity are still defaulted into F-Cash, rather than the money-market fund." The piece continues, "However, Fidelity did make one noteworthy change on Wednesday: The firm increased the yield on all cash-sweep holdings to 1.07%, up from 0.37% on balances of less than $100,000 and 0.79% above $100,000. The new yield applies to all cash balances that aren't defaulted into SPAXX." Barron's comments, "Of course, there is a good reason cash yields are so skimpy. Sweep accounts and deposits are a major source of revenue and profit for brokerage firms. Schwab reported that net interest revenue amounted to 57% of its total $10.1 billion in revenue in 2018, up from a 50% share of revenue in 2017. As Barron's reported, part of the rationale for Schwab's pending acquisition of brokerage and advisory accounts from USAA was the big pool of cash held by USAA customers." The piece adds, "Vanguard brokerage customers are automatically defaulted into Vanguard Federal Money-Market (VMFXX), a taxable fund yielding 2.19%." See also, Investment News' take on the news, "Fidelity draws adviser wrath with 1.9% cash offer." (Watch for Monday's Brokerage Sweep Intelligence report to reflect Fidelity's new higher rates, as well as a couple other changes. Ask us if you'd like to see the latest cut of this product.)
