Imagine signing up to a market-leading internet provider, only to discover sometime later that not only were other companies offering better deals, but your provider hadn’t exactly broken its back to invest in high-speed connectivity.
Who cops to the blame? Is it deceitful, or just bad service? Or is the onus on the customer to check the fine print?
Internet providers, of course, are not held to a fiduciary standard – but the scenario bears some similarities to the raft of litigation against brokerages over the interest rates they pay on cash clients hold in investment advisory accounts. The allegations claim that firms violated their fiduciary duty by providing relatively low rates on cash sweep accounts, while making large spreads on the money. Another line of the litigation accuses companies of failing to adequately disclose to clients that they had higher-yielding options available for their cash.
At the time of writing, and as reported by InvestmentNews, Wells Fargo, LPL, Merrill Lynch, Morgan Stanley, and Ameriprise were all facing lawsuits over their cash sweep rates, while the SEC was seeking “information” about certain Morgan Stanley accounts and investigating Wells Fargo. Wells Fargo and Morgan Stanley responded by changing the pricing for its cash sweep accounts.
No one cared much about these accounts when the federal funds rate was in the near-zero range, but the post-COVID spike to more than five percent has highlighted a disparity. Recent lawsuits against Wells Fargo cite its cash sweep rates in the 0.35 percent to 2.2 percent range, depending on the size of the account, comparing this unfavourably to sweep rates at Vanguard and Interactive Brokers of 4.6 percent and 4.83 percent respectively.
Low cash-sweep rates can undoubtedly generate significant revenue for these firms, who hold billions of dollars in these accounts. Are these cases of firms hiding the price tag, or are clients simply not paying enough attention? Success for the plaintiffs is hard to imagine if these rates were adequately disclosed.
The money held in these advisory accounts, unlike in brokerage accounts that fall under Regulation Best Interest (Reg BI), are held to a higher fiduciary standard. In this case, whether the firms violated this duty may depend on what exactly the relationship with the client was and whether a financial advisor was involved.
Of course, one firms is not obliged to offer higher rates just because another firm is, the argument being that these are designed to be transitory accounts and that generating revenue from them is simply smart business. But are clients getting fairly rewarded and are they being presented with the full range of options as to where to park their cash? Is this a case of clients being defrauded or just getting the rough end of sub-optimal service? These are all questions the allegations pose. One thing is for sure: cash sweep rates are now on everyone’s radar – and clients will be paying extra-close attention.
From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.
Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.
“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.
Sellers shift focus: It's not about succession anymore.
Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.
RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.
As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.
