Cash sweeps: Checking the fine print on a conflict of interest

April 25, 2023 11:00 AM

Very few wealth management firms are willing to engage with questions about their cash sweep programs, even though they represent about $1 trillion in client holdings across the industry.

Two experts whose firms work with wealth management companies on their cash management programs shared the notable figure for industry-wide holdings in sweep accounts with Financial Planning. Brokerage firms "sweep" clients' uninvested cash into accounts at internal and outside banks that hold the deposits. They represent an alternative to money market funds or certificates of deposits, but they usually pay much lower returns.

Read: The wealth management industry's $1T conflict of interest

Cash sweep accounts provide banks with a ready source of deposits and brokerage firms with profits on the interest rate yields. The clients get liquid assets available at their command and Federal Deposit Insurance Corporation protection for their cash. In terms of interest yields, the below slideshow displays the often-tiny benefits to the firm's customers.

FP reached out to Morgan Stanley, JPMorgan Chase, Charles Schwab, LPL Financial, Merrill, Raymond James, Fidelity Investments, Ameriprise, Wells Fargo, UBS, Edward Jones and Pershing with a series of questions about their cash sweep businesses.

Only Charles Schwab provided answers to all of the questions that the firm was willing to share publicly. Two other firms gave responses without permission to quote them; all other firms replied to the queries selectively or declined.

Here's what FP asked the firms:

Can you state any figures about the extent of cash assets in sweep accounts by the end of 2022 and the amount of revenue and/or profits generated last year from sweep accounts?
In terms of percentage points or basis points, what are the latest available figures for the yields to clients from sweep accounts and the yields to the firm?
How would the firm explain this line of business to clients asking how it's in their best interest?
How can financial advisors using your firm's brokerage and/or custodial services make use of higher-yield cash solutions for their clients?
What else should financial advisors know about your firm's cash sweep accounts?

To see the results of the queries and FP's accompanying research into the firms' cash sweep disclosures, scroll down the slideshow. For a look at the importance of cash in clients' portfolios in the wake of this year's banking crisis, click here.

Wealth management

The wealth management industry's $1T conflict of interest

April 25, 2023 11:00 AM

Note: The rates are subject to change based on Fed decisions and related market movement, so each entry displays the latest available figures as of April 20 or any other dates that the companies listed in their disclosures that day. All of the figures about company earnings came from their fourth-quarter earnings statements last year.

Morgan Stanley

Lowest yield tier: As of April 20, clients with up to $499,999 in cash got yields of 0.01%.

Company disclosure language: Free credit balances "will be automatically deposited into deposit accounts established for you by and in the name of Morgan Stanley Smith Barney, as agent and custodian for its clients, that are demand deposit accounts at Morgan Stanley Bank, and Morgan Stanley Private Bank, each a national bank, FDIC member and an affiliate of Morgan Stanley. Morgan Stanley will sweep free credit balances above $20,000,000 into a money market mutual fund."

Metrics displaying impact to business: At the end of 2022, the company had $198 billion in sweep deposits and $153 billion in other deposits by clients of Morgan Stanley and E-Trade in savings, checking, certificates of deposit and other money funds.

Company response: "We offer numerous cash alternatives, both Morgan Stanley products and from third parties, into which clients can choose to deploy their cash," spokeswoman Susan Siering said in a statement.

JPMorgan Chase

Lowest yield tier: As of April 19, clients with any cash sweep holdings got yields of 0.01%.

Company disclosure language: "The information above about recent yields for the bank deposit sweep option and available money market funds is provided so that you can review the various sweep options you may have, which may, at times, pay a higher return than the interest rate paid on deposits at JPMorgan Chase Bank. In selecting among your sweep options, it is important to note that JPMCB deposits provide the benefit of Federal Deposit Insurance Corporation insurance (up to applicable limits) while money market funds have investment risk of various degrees and are not guaranteed or insured as to principal. If you have a financial advisor, you can discuss your cash options as the yields on respective cash options may change, depending on market conditions, at different times throughout the year."

Metrics displaying impact to business: At the end of 2022, the company's forecast stated that it expected to earn $73 billion in net interest income this year.

Company response: The company declined to provide an on-the-record response.

Charles Schwab

Lowest yield tier: As of April 20, uninvested cash in Schwab brokerage and retirement accounts earned yields of 0.45%.

Company disclosure language: "You should also consider higher-return options for funds that are not needed immediately, as yields on any of our cash features are generally lower than or equal to those of similar investments or deposit accounts offered outside of the cash features program."

Metrics displaying impact to business: At the end of 2022, the company disclosed that it generates revenue of $45 million for every $1 billion in bank sweep balances.

Company response: "We believe there's two kinds of cash: cash for everyday use that needs to be easily accessible; and there's savings and investment cash that should be earning higher returns," spokesman Joseph Giannone said. "Our cash sweep is optimized for safety and liquidity, helps clients meet their everyday liquidity needs, and offers yields that are up to 45 times higher than what many U.S. banks pay on comparable checking accounts. We want clients to choose what best suits their needs, which is why we offer and promote a wide range of cash solutions. We also proactively contact clients about our cash alternatives because it's the right thing to do. Our goal is to ensure advisors and their clients have a clear understanding of their choices and how we make it simple to earn more on their long-term cash allocations."

LPL Financial

Lowest yield tier: As of April 1, clients with an LPL Deposit Cash Account received yields of 0.35%. Those with an Insured Cash Account of up to $150,000 got 0.35%.

Company disclosure language: "If you are investing through an advisory account, the fees that LPL receives from the banks is in addition to the advisory fee that you pay LPL and your financial professional. This means that LPL earns two layers of fees on the same cash balances in your LPL account."

Metrics displaying impact to business: In its fourth-quarter earnings presentation, LPL disclosed that the Fed's rate hikes had added $1.3 billion to its gross profits.

Company response: The company declined to provide a response.

Merrill

Lowest yield tier: As of April 19, Merrill clients with up to $1 million in cash assets deposited into any of its three programs earned 0.01%.

Company disclosure language: "If you hold cash balances in your account, our bank affiliates benefit financially when your cash is held in its bank deposit accounts affiliated with the cash sweep program because bank deposits are used to fund their current and future lending, investment and other business activities. This is a conflict of interest because their profitability is determined, in large part, by the difference between the interest paid on the bank deposit and the interest or other income earned on loans, investment and other assets which may be funded in part by bank deposits. In addition, our bank affiliates determine the interest rate paid to depositors in the cash sweep program."

Metrics displaying impact to business: Net interest income in parent Bank of America's Global Wealth and Investment Management segment, which includes Merrill, jumped 32% in 2022 to $7.47 billion.

Company response: Spokeswoman Julia Ehrenfeld sent a disclosure document summarizing the firm's cash sweep programs.

Raymond James

Lowest yield tier: As of April 20, clients with under $100,000 in cash sweeps got yields of 0.25%.

Company disclosure language: "Any cash coming into your Raymond James account — whether from a deposit by you, a dividend or interest payment, proceeds from the sale of a security, or otherwise — will be held in your selected sweep option until you (or the discretionary manager, if your account is managed) make a decision to use the cash for investment or other purpose. It is important that you monitor the amount of funds in your sweep option, and consider other options you may have for investment of those funds. Maintaining funds in your sweep option does not constitute or imply a recommendation by Raymond James that your funds should remain in your sweep option. Your financial advisor can discuss with you options other than or in addition to the cash sweep program for your assets."

Metrics displaying impact to business: In the fourth quarter of 2022, the Raymond James Bank's net revenue soared by 178% year over year to $508 million.

Company response: The company didn't respond to inquiries about its cash sweep program.

Fidelity Investments

Lowest yield tier: As of April 19, direct Fidelity individual retirement account holders got yields of 2.47%. For indirect clients using Fidelity Institutional's National Financial Services through one of the clearing and custodial firm's largest customers, Advisor Group, the lowest rate for cash holdings of up to $24,999 on April 1 was 0.35%.

Company disclosure language: "Fidelity receives a fee from each program bank in connection with the program that is typically based on the average aggregate daily program deposits held by each program bank. The fee paid to Fidelity will vary from program bank to program bank and will generally increase as the aggregate amount on deposit with the program bank increases."

Metrics displaying impact to business: At the end of 2022, Fidelity listed $902 million in money market assets.

Company response: "Fidelity Institutional provides a choice of core sweep vehicles to its intermediary clients, including money market funds and the bank deposit sweep program," spokeswoman Anjelica Sena said. "Fidelity's policy of core sweep choice provides clients with a significant advantage versus those competitors which offer no choice and where cash can be swept to the competitor's affiliated entity, typically at lower rates. We believe that Fidelity continues to deliver unparalleled value, choice, and transparency that other custodial providers simply can't match."

Ameriprise

Lowest yield tier: As of April 24 for sweep accounts held by Ameriprise's bank and those deposited in outside institutions, clients with cash of up to $99,999.99 received a yield of 0.25%.

Company disclosure language: "Your financial advisor does not recommend the sweep program offered to you for any particular account(s) and revenues received by our affiliates related to the sweep programs are not shared with financial advisors. Generally, the combined revenue earned by our affiliates American Enterprise Investment Services and Ameriprise Bank is expected to be (i) the highest when your account sweeps cash into an Ameriprise Bank Insured Sweep Account or Ameriprise Insured Money Market Account where Ameriprise Bank is utilized as a program bank; (ii) the second highest when your account sweeps cash into AIMMA where unaffiliated program banks are utilized; and (iii) the lowest when your account sweeps cash into an eligible money market mutual fund."

Metrics displaying impact to business: Cash balances in the Ameriprise Advice and Wealth Management segment rose 8% in the fourth quarter to $47.2 billion, with the average gross yield to the company skyrocketing by 311 basis points to 3.73%.

Company response: Spokeswoman Kathleen McClung said: "You can find information about our banking, lending and cash management solutions on this page of Ameriprise.com Cash, cards & lending | Ameriprise Financial. We also publish a full list of products offered on our platform here, including a number of external money market mutual funds. Investment fund screeners (ameriprise.com)."

Wells Fargo

Lowest yield tier: As of April 19, cash sweep holdings of up to $999,999 with Wells Fargo Advisors got a yield of 0.15%.

Company disclosure language: "The rate of return on any of our sweep vehicles may be lower than that of similar investments offered outside of the Cash Sweep Program. The Cash Sweep should not be viewed as a long-term investment option. If you desire to maintain cash balances for other than a short-term period and/or are seeking the highest yields currently available in the market, please contact your investment professional at the number on your account statement to discuss investment options that may be available outside of the Cash Sweep Program to help maximize your return potential consistent with your investment objectives and risk tolerance."

Metrics displaying impact to business: Net interest income for Wells Fargo's Wealth and Investment Management segment surged 53% to $3.93 billion in 2022.

Company response: Spokeswoman Jackie Knolhoff said: "Our Cash Sweep Program allows clients to earn a return on cash balances by automatically 'sweeping' cash balances into a sweep vehicle until such balances are otherwise invested or used to satisfy obligations arising in the account. Cash Sweep Vehicle eligibility is based on the type of investment account and nature of account ownership."

UBS

Lowest yield tier: As of April 19, clients with less than $250,000 in the UBS Bank USA sweep program earned 0.05%.

Company disclosure language: "UBS receives, to the extent permitted by applicable law, an annual fee of up to $50 from Bank USA and AG Stamford Branch for each securities account that sweeps through any of the bank sweep programs into deposit accounts at Bank USA and AG Stamford Branch, respectively. The program banks will pay UBS a fee based upon a percentage of the average daily deposit balance in your deposit accounts at each program bank. UBS, Bank USA and AG Stamford Branch will also each receive certain additional benefits in connection with the bank sweep programs."

Metrics displaying impact to business: Net interest income in the UBS Global Wealth Management segment grew 24% to $5.27 billion in 2022.

Company response: The company declined to provide an on-the-record response.

Edward Jones

Lowest yield tier: As of March 23, clients with Insured Bank Deposit accounts of less than $250,000 got a yield of 1%.

Company disclosure language: "Bank program interest rates may vary and are impacted by several factors, including the total amount paid on deposits by the banks, fees paid to Edward Jones, fees paid to a third party that assists in operating the bank program, and additional factors, including the use of a tiered schedule, as discussed below. Your decision to participate in the bank program constitutes your agreement to, and approval of, those fees. Edward Jones' fee may be more than the compensation it receives from alternative accounts or programs that are available for your deposits. The fee paid to Edward Jones may exceed the amounts paid to clients in the form of interest. None of the banks participating in the bank program have an obligation to offer the highest rates available, and each of the service providers, including Edward Jones, facilitating the bank program will charge such fees for their services as they determine in their discretion. Prior to making a deposit in the bank program, you should compare the rates of alternative accounts or programs available for your deposits, which may be higher depending on a variety of factors."

Metrics displaying impact to business: Client holdings in cash solutions increased 3% in 2022 to $51.3 billion.

Company response: Spokeswoman Catherine Stengel sent the following disclosures:
Insured Bank Deposit Program overview; Insured Bank Deposit Program disclosure; Current client yields

Pershing

Lowest yield tier: As of April 20, Pershing's two cash sweep programs paid respective yields of up to 2.32 and 2.53%. For indirect clients using Pershing through one of the clearing and custodial firm's largest customers, Advisor Group, the lowest rate for cash holdings of up to $24,999 on March 16 was 0.35%.

Company disclosure language: "Subject to certain exceptions, the maximum amount of FDIC deposit insurance coverage available on the total balance in most bank deposit sweep products is currently $2.5 million for each eligible category of legal ownership pursuant to FDIC regulations. Tiered rate bank deposit sweep products are also available, which have rates that vary between investors. Rates are displayed on customer statements and available through your Introducing Broker Dealer ("IBD") or Investment Adviser. Other bank deposit sweep products specific to certain pricing arrangements selected by an IBD or Investment Adviser are also supported. Rates on the bank deposit sweep products are displayed on customer statements and available through your IBD or Investment Adviser."

Metrics displaying impact to business: Net interest revenue for BNY Mellon's Market and Wealth Services segment, which is home to Pershing, climbed 22% to $1.41 billion in 2022. Pershing's revenue expanded by 10% that year to $2.54 billion.

Company response: Representatives for the firm declined to comment.