Cash sweep rates thrust into the spotlight

Cash sweep rates thrust into the spotlight
Are firms hiding the price tag, or are clients simply not paying enough attention? Either way, these accounts are now on everyone's radar.
AUG 21, 2024

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.

Latest News

Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel
Advisor moves: RBC swipes $1.7B UBS team, Baird duo departs for LPL's Linsco channel

RBC Wealth Management's latest move in New York adds an elite eight-member team to its recently opened Westchester office.

Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints
Stifel star broker, Chuck Roberts, leaves firm under cloud of investor complaints

Stifel – so far - is on the hook for more than $166 million in damages, legal fees and settlements in investor complaints involving Roberts, a 35-year industry veteran.

iCapital secures $820M in latest funding, hits $7.5B
iCapital secures $820M in latest funding, hits $7.5B

The giant alt investments platform's latest financing led by T. Rowe Price and SurgoCap Partners, along with State Street, UBS, and BNY, will fuel additional growth on multiple fronts.

Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity
Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity

Some investors recently have seen million dollar plus decisions by FINRA arbitration panels involving complex products decisions go their way.

What does it take to feel 'financially comfortable' or 'wealthy' in 2025?
What does it take to feel 'financially comfortable' or 'wealthy' in 2025?

New report shines a light on how Americans view wealth today.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.