Wells Fargo latest to be hit with 'sweeps' lawsuit

Add Wells Fargo to the list of firms being sued over the low returns offered on their "cash sweeps" policies.

A lawsuit filed on Tuesday in federal court in San Francisco on the behalf of a New Mexico resident named Keith Bujold accuses the wirehouse of failing to look out for its clients' best interests with its policy of "sweeping" their uninvested cash into bank accounts that offer far lower yields than easily available alternatives. The suit is being pressed by the same law firms bringing similar claims against LPL Financial and comes amid related legal actions against Morgan Stanley, Merrill and Ameriprise.

Wells acknowledged in November last year that the Securities and Exchange Commission was looking into its cash sweeps policies. Reporting its second-quarter earnings earlier this month, Wells said it was raising its yields on one of its sweeps accounts. That change, the firm said, is expected to lower its Wealth and Investment Management unit's revenue by $350 million this year.

The suit says that $350 million figure is almost an admission that something is wrong with Wells' sweeps policies, calling it "evidence of the massive windfall the programs provide to defendants at the expense of [Wells Fargo Advisors'] customers."

A lawyer for the plaintiff declined to comment. Wells Fargo also declined to comment.

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Sweeping up
"Cash sweeps" refers to wealth managers' practice of taking uninvested cash sitting in clients' brokerage accounts and moving into affiliated and unaffiliated banks. Many of the current suits questioning sweeps policies contend that firms lend the money out at relatively high rates but only share a small fraction of the returns with clients. They also note that wealth managers could easily do better for investors simply by putting their money in high-yielding money markets and savings accounts, many of which are now paying around 5%.

Robert Finkel, a senior partner at New York-based Wolf Popper representing clients in two similar cases against Merrill and another against Morgan Stanley, said the sudden flurry of litigation likely results from firms having offered paltry sweeps returns for so long.

"The rates have stayed so low compared with market rates, which tend to be high," Finkel said. "The delta between the two just suggests that there is something inappropriate with how low the sweep rates have stayed."

Unlike the recent series of cases accusing wealth managers of not living up to their fiduciary duty to put clients' interests first, Finkel's suits against Merrill and Morgan Stanley accuse the firms of failing to secure "reasonable" rates of return on money held in retirement accounts. Finkel said he had no estimate for when resolutions in those cases might be coming.

Rob Herskovits, the founder of New York-based law firm Herskovits, said suits over sweeps remind him in some ways of the regulatory scrutiny given a few years ago to some firms' handling of mutual fund investments. Some of the biggest names in the industry reached settlements often reaching into the millions over allegations that they had steered clients — either on purpose or through oversights — into funds that paid them higher fees rather than choose cheaper alternatives.

"It wouldn't surprise me if the firms bringing these sweeps lawsuits drew inspiration from those earlier cases," Herskovits said.

Herskovits said the new suit against Wells seems to rely greatly on the idea that the firm had a fiduciary obligation with its handling of clients' cash. But Herskovits said there's a real question about whether such a duty applies to cash held in brokerage accounts.

Peter Crane, the president of the money-market tracker Crane Data and the publisher of the Money Fund Intelligence newsletter, said he's particularly unsympathetic to arguments that firms have an obligation to help clients secure high returns on accounts they control directly. Self-directed brokerage accounts, he said, make it easy for investors to move money on their own.

"It's not like they hold you hostage," Crane said. "The nature of cash is you're welcome to leave at any time."

Wells' sweeps program
The new suit against Wells contends the firm's main sweeps program moves uninvested cash into five affiliated and unaffiliated banks. Rather than trying to negotiate for higher returns on behalf of its clients, the suit argues, Wells merely accepts the rates offered by its directly affiliated partners and then directs unaffiliated banks to pay the same.

In doing so, according to the suit, "[Wells Fargo Advisors] breached its fiduciary duties to its customers as their agent, and also breached its contract with those customers that it would act as their agent, not for its own benefit. WFA's process created a clear conflict of interest that WFA fails to properly disclose or mitigate."

The lawsuit also contends that Wells began to revise its public statements about its sweeps policies after other firms started coming under scrutiny for their handling of clients' cash. In late 2023, for instance, Wells changed its disclosure about cash sweeps to say that the returns offered through the program "are typically lower" than yields from regular bank deposits.

The change was still misleading, according to the suit. The yields on sweeps accounts are "always" lower, it contends, not just "typically."

The suit also notes that Wells began saying in its disclosures in 2023 that clients could most likely make better returns by putting their cash into money markets and similar vehicles. The action accuses Wells of breach of fiduciary duty, gross negligence, negligent misrepresentation and omissions and violations of New York state laws banning deceptive acts and unlawful practices, among other things.

Holding steady
Although firms are coming under increasing scrutiny for their cash sweeps policies, some are showing little inclination to budge in response. Executives at LPL, Stifel, Ameriprise and Raymond James all expressed comfort with their firms' general sweeps policies in their recent second-quarter earnings calls.

Meanwhile, Morgan Stanley executives said in their firm's second-quarter call that they are raising yields on advisor-led sweeps accounts in response to "competitive dynamics." A Morgan Stanley spokesperson later confirmed reports that the firm was raising its returns to 2% for clients with $250,000 or more in certain sweeps accounts.

Defenders of sweeps generally argue that the accounts give investors a place to hold their cash for the short term while they decide if they want to put it into stocks, bonds or other investments. They also note that sweep accounts offer protection from the Federal Deposit Insurance Corp., which guarantees up to $250,000 on individual accounts.

In response to the suit questioning Ameriprise's sweeps policies, for instance, a spokesperson for the firm said, "Our cash sweep is intended for money in motion, not as an investment option for significant cash balances over extended periods. Our programs comply with legal and regulatory requirements."

— This article has been updated with comments from industry experts.