- advertisement -

Do your homework when using a sweep account

Done't let brokers "sweep" away your profitsIf your money's being swept -- watch out it doesn't get swept away.

Many stock trading accounts have a feature that allows uninvested cash to be "swept" into a money market fund at the end of the day so it earns interest until it's reinvested.

Recently, a group of investors sued their brokers for fraud, claiming their money was swept into poorly performing money market mutual funds selected by the brokers. The investors claimed the brokers picked those particular funds because the brokers got a commission from the funds and their advisers. The court sided with the brokers and said the commission information was revealed in the prospectus.

The obvious lesson here is this: read the prospectus -- something, understandably, done by very few investors.

"Most of the prospectuses are so complicated that the average investor doesn't even attempt to read it, so it's never completely disclosed from their perspective," says certified financial planner Bryan Lee of Strategic Financial Planning in Dallas. "The Securities and Exchange Commission hasn't gone nearly far enough in requiring disclosure in a much easier-to-read format."

Over-reliance on your broker can be costly
Chris Cooper, a Certified Financial Planner based in Toledo, Ohio, says another part of the problem is investors relying too heavily on brokers.

"A lot of these lawsuits are suing the broker for breach of fiduciary responsibility," he says. "There is no fiduciary responsibility. They're in the business of manufacturing products. It's not the car dealer's job to make sure you get the right car for your needs. If that money market fund didn't fit their needs, they should have taken their account elsewhere."

A fiduciary responsibility means the client's interests always come before the interests of the firm or the adviser.

- advertisement -

Lee agrees with Cooper, and says if you're going to rely primarily on a broker or adviser's advice, you need to distinguish between the ones who don't assume a fiduciary responsibility and those who do -- and get it in writing.

Make no mistake, every broker and adviser is required by law to make sure their clients' accounts are handled in a suitable manner, but companies and individuals that accept a fiduciary responsibility are held accountable to a higher level.

Take the time to find the right fund
Choosing the right money market fund for your money is important because you may decide to park the money there for a while instead of reinvesting it in another risky tech stock.

If your trading account has a sweep feature, you should be given a choice of money market funds to select as the sweep account.

"I'd be concerned with a brokerage house or a bank that only gives one option. You should get several," says Lee.

Cooper says there may be circumstances where you'll be offered only an in-house money market fund.

"If you do a lot of rapid-fire trading, they may say you'll have to use an in-house fund because the time lag with an outside fund may be too great to cover trades."

What to look for in a sweep account
Yields and fees are important criteria in selecting a sweep account.

Robert McLeod, a finance professor at the University of Alabama, says if the prospectus makes your eyes glaze over, shop for the money market fund on a fee basis. Ask what the net yield is because it encompasses fees. Money market funds are mutual funds and are not backed by the FDIC. Nevertheless, they're usually very safe.

"The yield isn't guaranteed, it's definitely a floating rate. But you can look at it from a point of time comparison. Look at the options available today and the current quoted rate. Or, you can look at the average return over the last year. It can give you a feel for how they're doing."

Yields among money market funds can vary widely -- from as low as 3 percent to about 6.5 percent. Lee says the rate will be determined by a couple of things: fees and how aggressively the fund is managed.

Different funds with different risks
While money market funds are considered safe because they invest in short-term, high quality government and corporate securities, some funds are riskier than others. A U.S. Treasury fund may have less risk but probably also has a lower yield than a general-purpose fund; a taxable fund will give a higher yield than a non-taxable fund.

As important as yield and fees are, there are other factors to be considered.

"The more redemptions you can make -- the more checks you can write -- the lower the yield will be," says Cooper. "If you're investing on your own, ask, 'How hard is it for me to do this myself?' Is there good Web access, phone access? There are service issues, not just the yield."

Pick your sweep account just as carefully as you pick the stocks and mutual funds in your portfolio. Make every dime in your portfolio work just as hard as you do.

-- Posted: Dec. 12, 2000


top of page
See Also
Find the fees before funding a money market account (11/6/00)
Sweeping up returns with a checking account (12/28/98)


Checking and Savings
Compare today's rates
Interest checking 0.33%
MMA 0.39%
$10K MMA 0.36%

  How long will your savings last  
  How to reach a savings goal -- with scheduled payments  
  Watch your savings grow with regular deposits  
Checking Basics
Manage your account in a fee-friendly way.
What's the best checking
account for me?
ABCs of ATMs
What are all these fees?
Is online banking secure?

Banking glossary  
News archive  
Keep an eye on the leading rates  
Find a high-yielding CD

- advertisement -
- advertisement -