Don’t let your broker sweep your cash yield into the basement.
A “sweep” account is a parking place for idle cash in your brokerage account.
Cash from interest, dividends and securities sales flows into the sweep account — and that may mean that you have a pile of cash earning paltry interest.
Many major brokerage firms in recent years have eliminated higher-yielding money-market funds as a sweep option, pushing customers into lower-yielding bank sweep accounts. Often, the cash is routed to banks affiliated with the brokerage firm, plumping up the firm’s profits.
Brokerage firm Edward Jones eliminated its money-fund sweep option for new brokerage customers in February. Merrill Lynch removed money-fund sweep options for most new accounts last September, and most existing money-fund balances have been moved to deposit accounts at Bank of America, Merrill’s parent-company bank.
Such moves can seriously crimp customers’ yields.
The 100 largest taxable money funds yield 2.25 percent on average, according to Crane Data, while the average brokerage sweep account yields just 0.25 percent for balances up to $100,000.
The firms say they’re still offering competitive cash options.
“Our approach allows clients to choose from among an attractive set of cash-management options while Schwab earns returns on the net interest income,” said Schwab spokesman Mike Peterson. “Those returns are then reinvested in serving clients and returning value to the firm’s stockholders.”
Brokerage firms are trying to squeeze more profits out of customers’ cash as their earnings from trading commissions have taken a hit. An industry price war has driven commissions down to just a few dollars or even zero, in some cases.
For retirees holding significant amounts of cash, of course, maximizing cash yields may well be a top priority.
If your only sweep options are low-yielding bank accounts, you can always move that cash into a money-market mutual fund.
The top-yielding money funds available to individual investors now yield north of 2.5 percent. Investors looking for the safest cash options may want to stick with money funds holding Treasuries and other government securities.
A few firms have retained money-market funds as sweep options. At Vanguard, for example, the only sweep option is the Vanguard Federal Money Market Fund (symbol VMFXX), a government money fund that yields about 2.3 percent.
Another option: Shift your cash to a high-yield bank account. Goldman Sachs’ online bank Marcus, for example, offers a 2.25 percent yield. Pay attention to fees and other fine print. High-yield savings accounts may require a minimum balance to avoid fees or earn the best yield.
If you want some help chasing the highest yields, MaxMyInterest (www.maxmyinterest.com) will spread your money among various online savings accounts and regularly reallocate the cash to capture the highest rates, for a fee of 0.08 percent annually.