investing

Cash sweep: battleground for yield

"(People) don't come to us because we pay great cash rates, they come to us because we have a phenomenal platform for them to invest and trade on," says James Powell, managing director of treasury group at TD Ameritrade. "We have found that customers value cash from two perspectives. There's a segment of customers that looks at rates and says, 'My cash is worth a certain amount of rate.' And there are some customers who look at cash and say, 'I just want my cash to be accessible, extremely liquid, and I want it to buy these services.'"

Although only four of the 20 surveyed institutions automatically sweep excess cash into higher-yielding money funds, 14 of the remaining firms make specific money funds available to customers who request that their excess cash be swept into a higher-yielding alternative to a bank deposit account. Most of those funds require a minimum initial investment of $500 to $5,000, but some require considerably more; such as TD Ameritrade's $50,000 minimum for its Money Market Portfolio Fund. Charles Schwab and Smith Barney have very high thresholds, $500,000 and $250,000, respectively, for requesting money to be automatically swept into money funds, but that minimum includes all household assets held at the firms.

Two institutions, Merrill Lynch and Scottrade, make no provisions for customers to request that excess cash be swept automatically into money funds. If that's the case with your account, buy shares of a money market fund on your own when you have sufficient cash.

What's the expense ratio?
Whether your money is swept automatically into a fund or you have to choose one manually, pay attention to the expense ratio. Money Fund Intelligence lists the average expense ratio for a top-yielding prime money fund at 0.35 percent. ShareBuilder, which gets a pat on the back for automatically sweeping cash into a money market fund, tarnishes that shine by using one with an expense ratio of 0.9 percent. Compare Vanguard, which also automatically sweeps cash into a money fund, but charges only 0.24 percent. To top it off, Vanguard's yield is more than 0.5 percent higher than ShareBuilder's.

In truth, none of this is too troublesome for money-conscious consumers who pay attention to how their accounts are handled. Just as with most financial products, customers need to fend for themselves by reading the literature and making smart decisions.

Class-action suit filed
But some customers say they've been duped by some of the institutions into putting their excess cash into bank deposit products instead of money market funds. The result is a class-action lawsuit claiming not only that the institutions are using billions of dollars in clients' money without paying a fair interest rate, but also that the tiered structure in the bank deposit programs takes unfair advantage of clients with lesser amounts of money.

"One of the arguments we make is that these main firms really promote themselves these days as being financial advisers," says Joel Laitman, partner at the New York law firm of Schoengold Sporn Laitman & Lometti. "They're misleading their clients and they never disclose to their clients in a meaningful way that they're being financially injured and that these firms are making immense profits at their own clients' expense."

For more on this story, and to see if your investment firm is accused of this practice, read the Bankrate feature, " Cash sweep account controversy spurs lawsuit."

Whether you're a do-it-yourselfer when it comes to investments or you have someone else handle it for you, it pays to be on your guard. Know how your cash is invested, whether it's waiting to be deployed in the stock or bond markets or if it will be sitting in your account as cash for a prolonged period.

Some people may not care what their cash is earning when the rest of their portfolio is doing well, but they should. Cash is still king.

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