Do your homework when using a sweep account
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
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.
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
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
"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.