Advisers in a pickle over low-yielding cash sweep accounts

Advisers in a pickle over low-yielding cash sweep accounts
As interest rates climb, advisers are forced to rethink the cash management fund links to brokerages and custodians.
AUG 29, 2018

With interest rates edging higher and stock market valuations hitting peak levels, cash management is becoming a center-stage issue for financial advisers, and one that could have fiduciary implications. While cash typically makes up only a small percentage of client portfolios, and a lot of fee-based advisers don't even charge fees on cash balances, the rising yields on some money-market funds are drawing new attention to brokerage and custodian sweep accounts, which typically pay the lowest yields on cash. "We realize that our partners are out to make money as well, but we need to think about what we need to do to get our clients a competitive rate," said Chris Creahan, vice president of asset management at Sequoia Financial Group. "There is a fiduciary responsibility for us to be looking into that at all times." The appeal of sweep accounts is that they provide easy placement and storage of the cash that clients realize from dividends and other income generated by an investment portfolio. Brokerages and custodians usually establish sweep accounts linked to affiliated banks and then make money off the cash just as a bank would, mostly through lending programs. The main downside of the sweep accounts is the average yield, which Bankrate.com puts at about 25 basis points, woefully short of the average money-market fund yield of nearly 1.8%. Low-yielding sweep accounts have inspired at least one company to target advisers looking for cash-management alternatives. For a fee of 2 basis points per quarter, MaxMyInterest will move any size of cash account into the highest-yielding federally insured savings account. Sweep accounts have always paid lower yields than standard money markets, but until recently most yields were low across the board so the difference was less of an issue. And the rise in interest rates, combined with record-level equity markets, is increasing the appeal of the relative safety of cash and cash-equivalents to investors. There was some recent buzz across the financial services industry when the Wall Street Journal reported that Merrill Lynch will start linking cash to bank-affiliated sweep accounts in September, instead of sweeping the cash into higher-yielding money market funds. But the challenge of navigating low-yielding in-house cash management is not a new headache for financial advisers. "Everybody plays the same game with cash management," said Eric Freckman, managing partner at Guillaume & Freckman. "We take it on a client-by-client basis, but we don't think it makes a lot of sense to keep a large amount of cash in a sweep account." Mr. Freckman said that if a client has a large cash allocation and no near-term liquidity needs, he will usually park the money in a short-term bond fund. Dennis Nolte, vice president at Seacoast Investment Services, views sweep accounts as one of the many wrinkles facing fiduciaries. "In an advisory capacity you can't hold a lot of cash and justify charging a fee on that cash, so one option is to move it out of that account and send it to Vanguard or a credit union, where the client can earn a higher yield," he said. But that only makes sense if there are not immediate liquidity constraints, which is often the reason that investment accounts are holding cash. "It all depends on your definition of liquidity, which matters when you can get 2% from three-month T-bills," Mr. Nolte said. "But if you need the money tomorrow, you're kind of stuck with the brokerage sweep account."

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