The financial advice industry’s skirmish over cash sweep accounts is taking another turn, with clearing giant Pershing evaluating plans to create a new charge, akin to a tax, on cash held by its broker-dealer clients.
Pershing is discussing with broker-dealers that use its platform plans to get first dibs on cash – up to $10,000 – held in their customers’ accounts.
Industry sources stressed that Pershing has not yet finalized details of the new cash sweep plan but is discussing it with broker-dealer clients.
But, similar to a decision late last year by its leading competitor, Fidelity, Pershing is discussing intentions to sweep the first $10,000 held in a broker-dealer’s customer’s account into a money market fund or similar cash product that it controls, according to two senior industry executives with first-hand knowledge of Pershing’s plan.
Cash sweep programs have turned into a bit of a viper’s nest for the financial advice industry, particularly large broker-dealers.
Brokerage firms in particular have been criticized for having low rates in their sweep options while benefiting from margin loans they make and the spreads they retain from that cash. There have been numerous lawsuits filed over the issue, and companies have responded to the pressure by increasing the rates they pay clients for those cash positions.
“It sounds like, in effect, Pershing would take discretion over the first $10,000 of cash in a customer’s brokerage account,” said one senior industry executive. “That money would be diverted.”
“The rebate a clearing firm gives a broker-dealer in a cash sweep account normally is 50 basis points to 100 basis points, which is credited back to the broker-dealer,” the executive added.
The interest rate for the customer’s cash – as currently discussed by Pershing - will be 2.25 percent annually, according to the executives, who spoke confidentially to InvestmentNews about the matter. Pershing, however, would not rebate, meaning share, any additional interest it receives from borrowers when it lends the cash, potentially eating into a broker-dealer’s profitability.
Pershing is currently discussing with its broker-dealer clients about the changes to its cash sweep program and it’s not clear when any new plan goes into place. Toward the end of last year, Fidelity told registered investment advisors it would begin default all non-retirement cash to an in-house option in 2025.
A subsidiary of The Bank of New York Mellon Corp., Pershing provides trading and clearing services to and works with some of the largest independent broker-dealers in the industry, including Osaic and Cetera Financial Group.
The profitability of independent broker-dealers typically relies on revenue generated from cash sweep accounts. When interest rates rise, so do independent broker-dealer profits.
“We are evaluating changes to our cash sweep offerings for a select set of client relationships,” a Pershing spokesperson wrote in an email. “All clients will continue to have access to a wide spectrum of money market funds, FDIC deposit programs, a competitive cash yield product, CDs, and Treasuries.”
Spokespersons for Osaic and Cetera on Thursday did not return calls to comment about potential changes with Pershing’s cash sweep offering.
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