Your brokerage account has probably performed very well over the past several years. Both the Dow Jones industrial average and the S&P 500 are up more than 50 percent since November 2013. But you probably can’t say the same for the cash in your brokerage account.
Generally, savings accounts at brokerages aren’t paying an annual percentage yield (APY) as high as you can earn at some online banks.
“I do think that there’s a tendency to ignore the earning power of the cash that’s in your brokerage account,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “It may be sitting on the sidelines for a while until you find another compelling investment option. You want it to be earning a competitive return in the meantime.”
Here are three things to do if you have cash in a brokerage account.
1. Check the interest you’re earning – or not earning
First, check to see what interest your cash is currently earning.
Check your brokerage account statement, log in to your account or call your brokerage to see what type of account your cash is in and how it’s performing. Also confirm that your dividends are being reinvested; otherwise, they might be accumulating in a low-yielding account.
“They may think they’re in a money market fund because that’s traditionally where your cash in a brokerage has been parked, but a number of brokerages have somewhat slyly changed the default cash holding to an FDIC-insured bank account,” McBride says. “On the surface, that sounds great. But the reality is the yield they’re paying is about 0.1 percent instead of the 2 percent you can get in a money fund.”
If the cash is in a savings account, see what the APY is. If it’s a mutual fund, it’s going to specify the name of the fund and its ticker symbol, McBride says.
“If that’s not what’s listed — if it just says cash or something like that — that’s an indicator that it might be in a very low-yielding bank account,” McBride says.
Also check to see if you’re receiving monthly interest payments. If you’re not, you likely aren’t earning interest.
2. Know whether the account is insured
Money market mutual funds or money market funds likely qualify as securities for Securities Investor Protection Corp. (SIPC) protection. They’re protected when held at an SIPC-member broker-dealer. It’s possible for these securities to lose value, and the SIPC doesn’t protect your shares against market losses, according to SIPC.org.
A lot of people consider these two to be the same, but there are some subtle differences, McBride says.
“While the bank account is federally insured and rock solid from a protection standpoint, money market funds are very stable as well,” McBride says. “Most big brokerage and mutual fund companies would move heaven and earth to preserve the one dollar net asset value on their mutual funds. There’s too much reputational risk and risk of capital flight if they break the buck.”
Money market funds are likely going to earn competitive yields that keep pace with changes in the market, McBride says. So, if there is money that you want ready to trade at a moment’s notice, this may be a good spot for that bucket of money.
For the other money that you’re not going to invest, there are FDIC-insured savings accounts earning as much as 2.26 percent APY. You’re not likely to find those yields in a brokerage account savings account.
“The FDIC-insured bank accounts that most brokerages are offering are going to pay next to nothing because the brokerage is getting the return on your cash. Not you,” McBride says.
3. Find a better place for your emergency savings
Your emergency fund needs to keep up with inflation. Otherwise, it’s going to have lost purchasing power when you need to use the funds. This is why your emergency fund should be in a high-yielding online savings account, McBride says.
“That’s where you’re going to get the best yield — even better than what you’re going to find on money funds,” McBride says.
A brokerage account is the perfect place for cash that you want to invest when you see a buying opportunity in the market.
“You don’t want your entire emergency fund sitting in a brokerage account money market fund,” McBride says. “You’re leaving yield on the table, relative to what you could get in an FDIC-insured online savings account.”