Last week, in the wake of the Fed's rate cut, three brokerage firms cut sweep rates, most -notably yield leader Fidelity, who lowered rates from 1.07% to 0.94%. This week, another four brokerage firms followed suit and dropped rates, meaning seven out of 11 firms have now lowered rates following the September Fed cut. Raymond James, Schwab and Wells Fargo cut rates across the board while Ameriprise lowered rates only on one of its tiers. Fin-tech firm Betterment also lowered rates again this week (from 2.21% to 2.11%), as did a number of the highest-yielding banks. Our Crane 100 Money Fund Index fell from 2.04% to 1.80% in the week through Friday, Sept. 27 (after falling 12 bps the prior week, which also included a spike up to 2.08%). We review our latest Brokerage Sweep Intelligence publication, and quote from a couple recent brokerage sweep stories, below.
Among the latest reductions, Raymond James cut rates on its highest tiers (over $500K) by 0.20% and on all other tiers by 0.10%. Wells Fargo trimmed its rates by 0.01% on all balances below $1M; their $1M and $2M balances decreased by 3 bps and 7 bps, respectively. Schwab cut rates by 0.03% on all tiers below $1M; their $100K balance now sits at 0.15%. Their tiers above $1M fell by 0.06%. Finally, Ameriprise cut rates for its $250K tier to 0.20% from 0.25%.
Our Crane Brokerage Sweep Index, an average of the 11 largest brokerage firms' "sweep" rates, is currently showing a rate of 0.22% for balances under $100K, down 2 bps from 0.24% last week. The average FDIC sweep rate is now 0.23% for balances of $100K to under $250K, 0.28% for balances under of $250K to under $500K, 0.30% for balances of $500K to under $1 million, 0.49% for balances of $1 million to under $5 million and 0.59% for balances over $5 million.
Fidelity still holds the highest FDIC-insured sweep rates (among the $100K balance tier) with a yield of 0.94% as of September 27. (Note: This is comparing the FDIC sweeps; Fidelity also has an even higher yielding money fund sweep for new accounts.) RW Baird occupies the No. 2 spot in the weekly survey, paying out 0.57% on its $100K tier. Wells Fargo ranked third with rates of 0.16% at the $100K tier, followed by Ameriprise, Raymond James, Schwab and UBS , all with 0.15% rates. Morgan Stanley is paying 0.10% on balances of $100K, while TD Ameritrade is yielding 0.07%. Merrill and E*Trade ranked last with rates of just 0.05%.
The Wall Street Journal discusses sweeps in "Fed Rate Cuts Put Pressure on Electronic Brokers." The piece explains, "[S]ome of the juice behind the intensifying price war under way across the brokerage industry is drying up. Electronic brokers in recent years have become more reliant on their banking arms, which effectively subsidize low trading and investing fees. A key element of the business model was rising interest rates, but a flip in Federal Reserve policy this year to cutting them has changed the equation for e-brokers."
It continues, "But nothing is free. Behind the low prices offered to customers has been an explosion in the banking arms connected to online brokers. The bet has been that customers would prefer to sacrifice earning interest on their cash, and in some cases be willing to allocate more of their investment portfolios to cash instead of investing it, in exchange for low or no fees for products and services."
The Journal writes, "Rising interest rates have been key to this business model because they have more than made up for falling fee revenue. Schwab and others sweep money from clients' brokerage accounts into their banks, where the companies can earn more on the cash by investing the money themselves and lending it out. At Schwab, bank revenue now represents 60% of the overall amount, up from 38% in 2014. For E*Trade and TD Ameritrade, revenue generated by client cash now comprises about three-quarters and one-half of their businesses, respectively. That reliance means the online brokerage industry is increasingly at the mercy of the Fed."
The article adds, "Analysts aren't expecting a return to zero interest rates, and there are also silver linings that help offset the impact of falling rates. When a weaker economy weighs on the stock market, investors typically move a bigger share of their portfolios to cash for safety, and some of that cash is expected to flow into the brokerages' banks. And when rates drop, some customers who might otherwise move cash to higher-yielding alternatives, such as certificates of deposit, may be less motivated to do so because of those lower rates."
Finally, website OnWallStreet writes, "Cash sweep disclosures at center of lawsuit against Merrill Lynch." They say, "Merrill Lynch is facing a lawsuit that criticizes the firm's disclosures of a practice common at many brokerages -- cash sweeps. Sarah Valelly claims that inadequate disclosure and an unsuitable recommendation at Merrill Edge cost her more than $20,000 in cash yields over a 20-month period, according to a complaint which was filed in a federal court in New York in late August."
They quote from the complaint, "[Merrill's] sweep accounts pay investors a paltry 0.05% to 0.14% [APY] notwithstanding the absence of adequate disclosure, contract formation or customers' prior written affirmative consent to be placed into a sweep account." OnWallStreet tells us, "Among the claims in Valelly's lawsuit: negligence, breach of suitability standards and breach of contract. She is seeking injunctive relief and damages."
The article adds, "The firm will file a motion to dismiss the allegations by the end of the first week of November, according to a letter to the federal district judge that is dated September 20 and was filed in court by the wirehouse and retail brokerage's attorneys." For more Crane Data's Brokerage Sweep News, see: "Cash of the Titans Part II: Merrill Hit By Lawsuit Over Brokerage Sweeps (9/3)," "Cash of the Titans: Schwab vs. Fidelity; MF Yields Dip Below 2.0 Percent (8/13)" and "Fidelity Now Sweeps to Money Fund (8/8)."
