WSJ's Zweig on Schwab's Sweeps
The Wall Street Journal's "Intelligence Investor" column writes that "Your Stock Trades Go Free but Your Cash Is in Chains." Author Jason Zweig says, "Freedom isn't free, and free trades aren't either. Charles Schwab Corp. shook the brokerage industry this week when it said it will cut commissions to zero on Oct. 7. Schwab's move, which followed a similar cut by Interactive Brokers Group Inc. and has already been matched by rivals TD Ameritrade Holding Corp. and E*Trade Financial Corp. is likely to be copied by other big brokers. You no longer will pay a few bucks in commissions to buy or sell a security at these firms. But Schwab and other brokerage firms are in business to make money, and one way they often do that is by milking clients’ cash. When you trade for free, you still pay -- at a different tollbooth." He explains, "Schwab can offer such cheap options partly because of how it handles investors' cash. The firm automatically sweeps idle cash not into money-market mutual funds or other assets that could yield about 2% at today's rates, but into its own bank, which pays peanuts. As is typical in the brokerage business, Schwab puts clients' uninvested cash -- say, a dividend or interest payment -- into what's called a sweep account.... In the first half of 2019, Schwab clients moved $58 billion into money-market funds and other higher-yielding choices. But most don't bother.... Schwab pushed $11.8 billion out of higher-yielding money-market funds into deposits at its own bank in the first half of 2019, according to the company. As of June 30, deposits at Schwab's bank totaled $208 billion. This week, clients were earning between 0.12% and 0.55% on those balances. Schwab isn't alone. Across the brokerage industry, most sweep accounts pay measly rates -- sometimes as little as 0.05% on a $100,000 balance." The piece adds, "This year, with the Federal Reserve lowering interest rates, sweep yields have fallen by nearly one-third, to 0.2%, since they peaked in March, according to Crane Data, a firm in Westboro, Mass., that tracks cash accounts. Average money-fund yields shrank less, to 1.8%. With rates falling, investors care less about what their cash is earning. 'A lot of the brokers are counting on this desensitivity to rates now,' says Peter Crane, president and publisher at Crane Data."
