Financial Planning magazine published a piece, "The wealth management industry's $1T conflict of interest," which explains, "[T]he brokerage industry's widespread and lucrative practice of cash sweeps has drawn extensive regulatory scrutiny and the ire of consumer advocates since it started around 2000. As long as the firms fully disclose the conflict of interest, though, there is nothing illegal about rolling up clients' uninvested cash into bank accounts that pay brokerage firms the vast majority of rising interest yields that feed the industry's bottom line more every time the Fed raises rates."
They continue, "Some argue that the sweeps help pay for commission-free trades, boost access to capital and expand FDIC coverage of cash deposits. Others question whether advisors and their clients are aware that there is an estimated $1 trillion in brokerage cash sweeps that they could move into money markets, certificates of deposit and other higher-yielding accounts to tap into those climbing interest rates themselves."
The article quotes, "There's 'nothing nefarious' about cash sweeps, according to Josh Siegel, the founder of New York-based StoneCastle Partners, whose subsidiary, StoneCastle Cash Management, offers one of the other options for a better yield on clients' liquid assets, FICA For Advisors."
They write, "The statistics show the huge stakes to clients and the industry alike from cash. Liquid assets in general may not receive enough attention, even in times of low or zero interest rates. Americans lost more than $600 billion in yields over the past eight years on their holdings in savings and checking accounts by keeping cash with mega-bank 'money center' institutions like Bank of America and Wells Fargo, The Wall Street Journal estimated in a January study. The publication came up with the figure by comparing the assets in those accounts to their values if they had been held in cash vehicles with higher yields."
The article continues, "Cash sweeps deal clients out of the mix for the value to be gained on those assets, as evinced by the disparity between them and money market funds or certificates of deposit. As of April 19, money-market research service Crane Data's Crane 100 Money Fund Index had reached an average annualized yield of 4.64%. Charles Schwab's money funds, for example, carried yields of up to 4.83%, and the firm's CDs offer returns of as much as 5.15%. In contrast, the 'everyday cash' at Schwab -- meaning uninvested assets in brokerage and retirement accounts -- paid a rate of 0.45%."
It also tells us, "[B]rokerages are 'absolutely addicted and dependent on those flows' into cash sweep accounts, and 'right now, the hottest game in town is cash harvesting,' said Tim Welsh, the CEO of industry consulting firm Nexus Strategy. Like many experts, he attributed the rise of cash sweeps to vanishing trade commissions and fee compression in asset management."
The cover story mentions, "Two of the largest technology firms providing cash sweep services to brokerages, IntraFi and R&T Deposit Solutions, explain the service clearly on their respective websites. 'With IntraFi Sweep, your firm can: significantly increase profit margins over those earned from short-term investment accounts, like money-market mutual funds; control the margin earned from the service; tier the rate offered to various customer segments, if desired; fund affiliate banks, if desired or applicable -- and switch back and forth between placing funds with affiliated and unaffiliated banks based on the affiliated bank's liquidity needs."
It adds, "A pair of the biggest competitors to IntraFi, Reich & Tang Deposit Networks and Total Bank Solutions, combined into R&T Deposit Solutions last June under an acquisition by Reich & Tang and its private equity backer, Estancia Capital Partners, as well as institutional co-investors. The combined firm's sweep programs have reached more than $200 billion in assets under administration in a network of 100 wealth management firms as clients and 350 banks and other institutions, according to Kevin Bannerton, R&T's head of wealth management."
In other news, the Federal Reserve Bank of New York posted a "Statement Regarding the Policy on Counterparties for Market Operations and Reverse Repurchase Counterparties." It states, "The New York Fed has made the following adjustments to the Policy on Counterparties for Market Operations and expectations and eligibility requirements for Reverse Repo Counterparties. The Policy on Counterparties for Market Operations has been updated to clarify that, in addition to implementing monetary policy, broader policy goals including fostering financial stability and ensuring bank safety and soundness, are considered when reviewing a prospective or existing counterparty."
The statement continues, "To ensure alignment with counterparty policies for other market operations, expectations and eligibility criteria for Reverse Repo (RRP) counterparties have been updated to clarify that accessing RRP operations should be a natural extension of an existing business model, and the counterparty should not be organized for the purpose of accessing RRP operations. SEC registered 2a-7 funds that, in the sole judgment of the New York Fed, are organized for a single beneficial owner, or exhibit sufficient similarities to a fund so organized, generally will be deemed ineligible to access reverse repo operations."
It adds, "This generally would not disqualify a fund that serves as the cash management vehicle for multiple funds or investment entities in an investment fund complex. Accordingly, eligibility criteria and the expression of interest form for these funds have been updated. These updates are intended to clarify the New York Fed's existing counterparty management practices and do not impact the participation of current RRP counterparties."
