WSJ Hits Brokerage Sweep Rates
The weekend Wsll Street Journal features the piece, "Don't Sweep Cash Under Brokerage's Rug." Author Jason Zweig writes, "Interest rates are on the rise, but customers of brokerage firms aren't going along for the ride. The Federal Reserve has driven short-term interest rates up a full percentage point since late 2016; one-month Treasury bills were yielding 1.6% this week. But you'd never know any of that from looking at the returns on the cash in your brokerage account. Consider the rates major brokers are paying on so-called sweep accounts, the main reservoir where they hold clients' cash. As of March 2, according to Crane Data, a firm that monitors money-market funds and other cash investments, yields on sweep accounts ranged from as low as 0.01% at eTrade and 0.05% at TD Ameritrade up to -- if "up" is the right word -- 0.25% at UBS and 0.27% at Fidelity Investments. Those rates are for clients carrying cash balances between $100,000 and $250,000. Yields can be even lower for the great unwashed." The Journal article continues, "In fairness, brokerage firms aren't the only skinflints in the financial industry. Yields on savings accounts at the biggest retail banks range from 0.00% to 0.13%, says Ken Tumin, founding editor of DepositAccounts.com. Rates on checking accounts have inched up only about a quarter of a point since late 2016. Many money-market mutual funds have also dragged their heels. Even so, brokerage firms stand out for how little they pay on clients' cash. That's partly because commissions and trading volume continue to wither. By paying paltry interest on the money they take in and then investing it at market rates, brokers can pocket the difference as a welcome and low-risk source of profit." Zweig's column adds, "Since the Fed began raising rates, yield differences of 'only a fraction of a percent haven't seemed to matter,' says Peter Crane, president and publisher at Crane Data. 'Brokerage firms have basically been betting on the laziness of their investors.' Charles Schwab is even taking its yields down as market rates go up. It is replacing a money-market sweep fund that has been earning about 0.8% -- one of the highest rates among brokerage firms -- with a bank sweep yielding 0.12%, squarely at the average for the industry. According to the Financial Industry Regulatory Authority, free credit balances -- one partial measure of uninvested cash in brokerage accounts -- totaled $350.2 billion at the end of January. Assuming the average yield of 0.12% that Crane Data estimates for brokerage sweep accounts, investors would earn an aggregate of only $420 million in income on that money over the next year. If, instead, investors shopped around to improve their yield and earned an average of 1% on that cash, they would pocket $3.5 billion in income. Overall, then, the cost of that inertia is roughly $3.1 billion. If you don't shop around for better yields on your cash, you're handing your broker another 1% a year."
