![]() ![]() 1.Īlthough it is earning more from bank sweeps, Schwab said it had drastically cut trading commissions clients with as little as $50,000 pay $12.95 a trade, down from $29.95 in early 2004. New accounts of customers with household assets of less than $500,000 will go to bank sweeps as of Sept. The firm is expanding that effort this year. Several online brokers, including Schwab, launched bank sweeps in 2003.Īfter founding its own bank that year, Schwab began moving investors with less than $100,000 in firm-wide assets out of sweep money funds. Sweeps to bank deposits took off after Merrill Lynch began the move in early 2000. Some of those options, such as ultra-short-term bond funds, however, can carry the risk of principal loss, while others, such as certificates of deposit, tie up money for set periods of time. “We put a lot of the earning strength” from bank sweeps into lower commissions, said Rob Shenk, vice president of E-Trade Bank.īrokerages also say that money in sweep accounts is primarily for investing, and that customers who want higher-yielding parking spots for their cash have alternatives. Money market funds, by contrast, aren’t federally insured.īrokerages say the extra profit they make from bank sweeps has allowed them to cut some fees and expand services. ![]() They play up the fact that bank accounts carry federal deposit insurance up to $100,000 per account. Some brokerages say they have no choice but to trim sweep-account rates, given the dramatic falloff in stock trading by individuals and the commission price war that has thrashed the industry. “In some instances, you’ve got to read through 40 pages of paper, and the print can be very small,” said Grace Vogel, NYSE executive vice president of member firm regulation. In a warning to firms in February, the NYSE told them to mail clearly worded disclosures to customers about bank-sweep programs. The move to bank deposits has caught the attention of regulators at the New York Stock Exchange, who are worried that brokerages may not be properly disclosing the account shifts to customers and may in some cases be stuffing them into unfairly low-yielding accounts. “It’s become a competitive necessity now.” In that period, money-fund investors have earned $750 billion in interest, $250 billion more than if they’d been in bank deposits, said Peter Crane, managing editor at IMoneyNet.įrom the brokerages’ standpoint, “the profitability of these is irresistible in an era when their trading volume is getting squeezed,” Crane said. ![]() IMoneyNet calculates that money funds have historically yielded an average of 1.5 percentage points more than bank savings accounts over the funds’ 35-year history. By contrast, a brokerage offering a money market fund that is managed in-house would earn about 0.4% on the assets, if it charged the average management fee. The net result is that, by forcing money into a bank sweep account, a brokerage can earn 2 to 4 percentage points on the cash, according to IMoneyNet. ![]() For example, a TD Waterhouse investor with $25,000 earns 1.36%, but someone with less than $5,000 takes home a rate of 0.25%. And unlike money funds, many bank sweeps have several tiers in which smaller accounts earn lower rates. Money funds have an obligation to get the best possible return for investors, something that is not the case with bank accounts. ![]()
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