This past weekend, both The Wall Street Journal and Barron's discussed the news that Morgan Stanley would buy E*Trade, citing sweep cash as one of the major reasons behind the move. The Journal's Jason Zweig writes in, "What the E*Trade Deal Tells You About the New Investing Game," that, "Morgan Stanley's takeover of E*Trade Financial Corp. for $13 billion shows how drastically the brokerage industry's business model has changed. Firms no longer want to offer investment products from all sources. Instead, they want to milk their customers' cash and manage all of the assets themselves. Investors need to understand the rules of the new game." We review this merger, as well as the latest statistics on the brokerage sweep sector, below.
The Journal explains, "Wall Street can't make oodles of money off your trades anymore; technology has driven commissions to near zero. And it can't make the windfall it once did off managing portfolios; there, too, market-tracking index funds and exchange-traded funds have become cheap as dirt. Where are the remaining profits for brokerage firms?"
They answer, "They can take your cash and, instead of investing it for your benefit in the highest-yielding money fund or deposit account, they can put it in their own bank and pay you peanuts. Then they lend it out and keep the profit for themselves. Morgan Stanley, E*Trade and Schwab all own banks to which they route much of their customers' cash. E*Trade pays its customers 0.01% to 0.25% on their uninvested cash; Morgan Stanley, 0.03% to 0.2%; Schwab, 0.06% to 0.3%."
The piece elaborates, "Brokerages have been pocketing 2% and up on that money (and you can do almost as well, if you pull the cash from your brokerage account and park it in a certificate of deposit or savings account at the right online bank). Schwab, which has hoovered up $220 billion in bank deposits, earned 61% of its total net revenues in 2019 from the interest it captured on those balances."
Barron's article, "Wall Street Is Taking Over Main Street. Morgan Stanley's Deal for E*Trade Heats Up the Race," tells us, "E*Trade will lift Morgan's deposit base to over $200 billion.... E*Trade brings a few other prized assets to Morgan Stanley. Included in its $360 billion of client assets are $56 billion in cash deposits -- a low-cost, stable funding source that Morgan Stanley can transform into interest income for its bottom line."
It also comments, "Goldman's Marcus platform has garnered the most attention in its retail push. In its three years, Marcus has grown rapidly. Over the next five years, Goldman hopes deposits and loans will exceed $125 billion and $20 billion, respectively, up from $60 billion and $7 billion.... And Vanguard Group, although not a big player in retail brokerage, is developing a new low-cost robo service and using its enormous scale to scoop up more fund assets."
Barron's adds, "[Morgan Stanley CEO James Gorman] also sees an opportunity to accelerate deposit growth with digital banking, through E*Trade's checking and online bill-paying service.... Nearly two thirds of E*Trade's $2.9 billion in revenue last year came from interest income on cash deposits."
Rates were largely unchanged in the latest week while brokerage sweep accounts remained flat. Our Money Fund Intelligence Daily shows the flagship Crane 100 MF Index unchanged at 1.42%. The Crane 100 is down from 1.81% on Sept. 30 and down from 2.18% on June 30. It is down 81 bps from the beginning of 2019 (2.23%), but up from its near low of 0.06% ten years ago (12/31/09). The Crane Brokerage Sweep Index, which is currently 0.12%, is up 7 bps from ten years ago (0.05%) and down 16 bps from the end of 2018 (0.28%). Our latest Brokerage Sweep Intelligence, with data as of Friday, Feb. 21, shows no major brokerages lowering rates in the past week.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data, shows a 7-day yield of 1.30%, unchanged in the week through Friday, Feb. 21. Treasury Inst MFs , Government Inst MFs and Prime Inst MMFs were all flat at 1.32%, 1.38% and 1.51%, respectively. Treasury Retail MFs currently yield 1.06%, (unch.), Government Retail MFs yield 1.07% (up 1 bps), and Prime Retail MFs yield 1.33% (down a basis point), Tax-exempt MF 7-day yields increased 0.06% to 0.74%.
Crane's Brokerage Sweep Index remained flat at 0.14% in the week ended February 21 (for balances of $100K. E*Trade and TD Ameritrade currently have the lowest rate for balances at the $100K level (0.01%). Meanwhile, Fidelity continues to have the highest sweep rate (0.82%). (Fidelity also has a higher-yielding money fund option for new accounts.) Morgan Stanley is paying 0.03%. UBS, Merrill, Raymond James and Wells Fargo are all paying 0.05%, and Schwab is paying 0.06%. Ameriprise is paying 0.08% and RW Baird is paying 0.33% for balances of $100K.
Our MFI Daily, with data as of February 21, shows money fund assets have risen $30.8 billion over the past week to $3.965 trillion. Prime assets were up $4.1 billion, Government assets were up by $15.3B. Tax-Exempt MMFs increased $1.4 billion. The MFI Daily also shows money fund assets up $39.5 billion month-to-date to $3.965 trillion. Prime assets are up $26.5 billion MTD, while Government assets are up by $12.3B. Tax-Exempt MMFs increased $668 million. Prime and Government MF assets were up $378.7 billion and $492.6 billion in 2019, respectively.
For more, see our latest Brokerage Sweep Intelligence, or see these Crane Data News articles: N-MFP Holdings Shows MMF Assets Hold Above $4.0 Trillion; Sweeps Flat (2/11/20), Concerns Remain about Brokerage Cash Says Investment News; Sweeps (2/4/20), FINRA Fallout: More on Sweeps, Fin-Tech Cash Accounts by ignites, FP (1/22/20), Finra Latest To Scrutinize Sweeps (1/15/20), Ignites on UBS Sweep Changes (12/9/19), More on Regulators and Sweeps (11/25/19) and SEC Warns on Cash Sweeps (11/12/19).
