Ameriprise sued over sweep account rates

Ameriprise on Monday became the latest brokerage to be sued over its cash sweep account program, facing allegations that the company failed as a fiduciary by keeping big spreads for itself rather than giving clients higher rates.

In the complaint filed in US District Court for the District of Minnesota, two plaintiffs wrote that, “this case concerns a simple ruse: instead of fulfilling its fiduciary duties, contractual obligations, and a regulatory mandate to act only in the best interests of their clients, defendants implement a scheme whereby they use their clients’ cash balances to generate massive profits for themselves while shortchanging their clients.”

The case centers on the default holdings for brokerage clients who temporarily have assets in cash. Although customers have the option of putting their money into a Dreyfus-sponsored government money-market fund, the default is Ameriprise’s money market account, which first directs uninvested cash into the company’s affiliated bank, according to the complaint. In the case that the amount of cash exceeds the FDIC limit, the excess is swept into other banks in the program.

While the rates offered for cash sweep accounts range from 0.3 percent to 2.18 percent for Ameriprise clients, competitors like Vanguard and Interactive Brokers have options of 4.6 percent and 4.83 percent, respectively, according to the complaint.

Brokers, including Ameriprise, have a strong incentive to retain portions of the interest on uninvested cash, which boosts net interest income, the plaintiffs stated.

“Our cash sweep is intended for money in motion, not as an investment option for significant cash balances over extended periods,” an Ameriprise spokesperson said in an email. “Our programs comply with legal and regulatory requirements.”

The lawsuit follows others that have been brought against firms including Merrill Lynch, Morgan Stanley, and LPL over sweep account rates.

Adding to that is pressure from regulators. Last year, for example, Charles Schwab agreed to pay $187 million to settle an SEC case over an alleged lack of disclosure about how the firm’s robo advisor used clients’ cash to generate revenue. Also in 2023, Wells Fargo disclosed that it was facing an SEC investigation over cash sweep accounts, and that firm earlier this month announced that its Wealth and Investment Management group raised its pricing on sweep deposits and advisory brokerage accounts.

Even so, sweep account rate changes have not been the norm this year, said Pete Crane, president of Crane Data.

“There have been repeated lawsuits in the sweep space, and none of them [have been successful],” Crane said, noting that the cash holdings are designed to be temporary. “It’s not like [clients] are being held hostage. They send you a checkbook.”

While he doesn’t think the lawsuits brought against brokerages will go anywhere, it is notable that the SEC put pressure on Schwab and Wells Fargo, he said.

“Clearly there is some money in these channels that tend to be more sensitive to rates,” he said.

A big issue for brokerages is maintaining profitability in connection with those assets, as net interest income can be critical to their bottom lines, he said.

But the companies are well-aware of the issue, and the movement of money from bank deposits to money market funds across the industry is telling, he said. While some are hopeful that the assets will flow from money markets to the stock market, that is unlikely, as the $6 trillion in money funds competes with cash, not equities, he said.

“What makes people think it’s going into the stock market is beyond me,” he said.