Cash Sweep Swept Under The Rug

The Securities and Exchange Commission is considering rules requiring more disclosure about the cash sweep choices in investment accounts. The need for more disclosure arises from large brokerage firms forays into banking. In the past cash balances at firms like Merrill Lynch, Morgan Stanley, and Wachovia were automatically swept into money market mutual fund accounts. These money market fund invested in short term treasury and corporate securities and paid out dividends that were very competitive after deducting the funds management fees with were very reasonable, averaging around one tenth of one percent of assets.

All of that began to change when these firms started to buy banks and offer banking services. The firms realized they could offer bank deposits which provided a cheap source of deposits for their banking subsidiaries, pay lower interest rates (sometimes based on the size of your account), and pocket more income from net interest income.

While money market mutual fund sweeps are still available, you have to ask or opt out of the bank deposit defaults. The SEC wants firms to advise investors of this option on a quarterly basis.

If you have an account that is being swept into a bank deposit program you should ask your broker what alternatives his firm offers. If you use a money market mutual fund you will give up FDIC insurance on those deposits, but will probably receive a much higher interest rate. Firms are loath to reveal the options because this is such profitable business for them.

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