Sweep Accounts: Watch Out!

This article from Investors.com highlights a new trend that some brokerages are using now to make more money from your account: Not all sweep accounts are created the same and you may need to make sure your excess funds are being swept into the right account.

Sweep Account

A “sweep account” is an account into which your excess cash is invested in order to earn interest. Typically a sweep account pays a money market interest rate, which is higher than a savings account interest rate. A sweep account that pays a money market rate is more in focus now because, at 2% or even slightly higher, the money market rate is higher than one can get in a longer-term bond. This is what a flat or inverted yield curve is all about.

Be Proactive

The Investors.com article shows that some brokerages – Schwab being the primary example – are not sweeping excess funds into money market funds. Schwab’s sweep account, for example, pays an interest rate of 0.61%, far lower than most other money market funds. Schwab has a money market fund, but if you are a Schwab account holder, you must proactively invest in its money market account. It’s easy to do – just do it through your online portal – but Schwab won’t do it for you. Schwab is not the only firm that does this. Merrill Edge, for instance, has a money market account that is not its standard sweep account.

It Makes a Difference

It makes a big difference if your sweep account pays 1% vs. 2%. Think about big institutions with millions of dollars invested. The extra 1% adds up to big money. For the small investor, the marginal interest you earn may not seem like much, but it is important not to feel taken advantage of. Also, think about it from the brokerage’s perspective: It’s a lot of money to them if they can avoid paying their customers an extra 1% on their deposits.

IMO

I recommend you go into your web portal or look at your statements to see what your excess cash is being swept into, and what the interest rate on that sweep account is. Then figure out if there is another equally-safe money market account available at your brokerage. It may be worth it to transfer your excess cash into the higher-paying account, especially if you anticipate the cash remaining there and if it is equally safe and easy to invest if a better opportunity presents itself.

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