MarketWatch on Brokerage Sweeps
MarketWatch writes, "Cash in your brokerage account may be costing you thousands." The article says, "Savers rethinking their cash options amid rising rates and recent bank failures shouldn't overlook their brokerage 'sweep' accounts. Many brokerage firms automatically sweep customers' uninvested cash into bank-deposit vehicles that may come with federal deposit insurance coverage but offer yields that in many cases have remained stubbornly low even as the Federal Reserve aggressively hikes rates. At Morgan Stanley, for example, sweep rates start at 0.01%, rising to 0.5% for cash of $5 million and above, whereas the average money market mutual fund yields well over 4%. Money market funds do not come with FDIC coverage but invest in very high-quality, short-term debt and aim to maintain a steady $1 share price." It tells us, "The yield gap between brokerage sweep accounts and the 100 largest taxable money market funds hit a record high of just under 4 percentage points at the end of February, according to research firm Crane Data, with the sweep vehicles yielding an average 0.43% and the money funds 4.39%.... Some brokerage firms have been able to keep sweep rates low in part because investors see these vehicles as very short-term parking spots for cash and don't focus on the yield. 'Most people in cash think they're only going to be there a matter of weeks,' said Peter Crane, president of Crane Data. 'But over time, the balances add up.'" The MarketWatch piece also comments, "The yawning yield gap means that investors leaving substantial sums in brokerage sweep accounts for any length of time should reassess their options, experts say. Brokerage firms' default sweep vehicles may be convenient and often provide the safety of FDIC insurance. But 'it's not like they're holding you hostage,' Crane said. Indeed, many small investors in recent months have switched cash over from brokerage sweep vehicles to money-market funds, he said, helping to drive money-fund assets to a record of more than $5.3 trillion in mid-March." Finally, the article adds, "The failure over the past week of Silicon Valley Bank and Signature Bank may only accelerate a broader trend of savers yanking money from lower-yielding bank deposits, said Ken Tumin, senior industry analyst at LendingTree. Particularly for those with cash balances over the $250,000 FDIC limit, 'it might be another reason for them to expedite movement over to T-bills and money market funds,' he said, as the yield differences and stability concerns dampen savers' enthusiasm for keeping large balances in bank deposits. Low brokerage sweep rates were already drawing scrutiny a year ago when the Fed started raising rates. Massachusetts Secretary of the Commonwealth William Galvin in March 2022 directed the state's securities division to investigate brokerage firms' sweep account rates. Letters sent to a half-dozen brokerage firms, including Bank of America's Merrill and LPL Financial asked whether the firms intended to increase their sweep rates and how risks and any conflicts of interest associated with the sweep programs were disclosed to customers, among other issues. Sweep account rates used to be more competitive with money market funds, but as brokerage firms have shifted to zero-commission trading, they've become more dependent on sweep revenues, Crane said. In some cases, a sweep vehicle may funnel deposits into a brokerage firm's affiliated bank and boost profits for the parent company."
