Bank savers are thriving these days, with many certificates of deposit, money market accounts, and high-yield savings accounts earning returns of around 5% due to the high interest rate environment.
A frenzy for competitive yields has enveloped sweeps accounts, which for decades have operated in a quiet, discreet manner in the shadows of Wall Street.
Sweep accounts automatically direct cash to a money market account at a bank or brokerage where you can earn ample interest at the end of each business day. Sweep accounts allow savers and investors to earn a yield on funds that lose value due to inflation, instead of earning zero dollars.
With competitive money market rates, Sweep Accounts provide a profitable safe haven for cash funds held overnight. On the downside, fees can reduce returns on sweeps accounts, and returns on money market accounts, like other assets, are not always constant and depend on favorable interest rates.
Here we take a closer look at sweep accounts, how they work, and whether they are a no-brainer for bank and brokerage investors looking for income.
Sweep accounts automatically move (“sweep”) cash in excess of the limits set in your bank or brokerage account to your investment account. These can be used by individual or corporate banking and brokerage customers.
“That way, the extra money earns interest and doesn't just sit around,” says Deiten Lindsberger, chief revenue officer at lending platform Niche Capital. “Investors love these accounts. They think of it as 'automatic investing.'”
At the end of the day, if you have cash in your main bank or brokerage account that exceeds the set limit, the extra dollars are transferred to another account, such as an investment account. “The cash stays in that account and earns interest until you decide to put it back into your main account,” Lindsberger says. “You can usually obtain a bulk account through a bank or brokerage by maintaining a certain minimum balance or signing up for a package of services.”
For example, let's say you have a brokerage account that holds $10,000 for stock trading.
“At the end of the day, any amount over $10,000 is automatically moved or deposited into another investment account, such as a money market fund, where it earns interest,” Lindsberger says. “If his balance is $16,500, $6,500 will be transferred and he will have more money.”
Sweep network organizations typically spread business deposits across multiple banks so that customers receive higher Federal Deposit Insurance Corporation (FDIC) deposit insurance coverage.
“This allows depositors to expand their savings while maintaining just one banking relationship,” said David Quinn, chief financial officer at digital banking platform Bluevine.
Most banks and brokerages offer some form of cash lump sum program, but their labels vary. “Cash sweep programs include 'program banks,' 'omnibus accounts,' and 'FBOs' (short for 'for profit'),” said Gary Zimmerman, founder and CEO of the money management platform. You can tell them apart because they often contain terms.” MaxMyInterest.
Find out about the terminology your bank uses to ensure you get the best deal. Several large companies have paid fines in recent years for putting customers on cleaning trucks that don't offer the best returns.
“Notable examples include Schwab, which paid a $187 million fine, and Boya Financial, which paid a $23 million fine for breaching its fiduciary duties to customers,” Zimmerman said. .
advantage
Expanding FDIC coverage. If you spread your funds across multiple banks, you can receive up to $250,000 of Federal Deposit Insurance Corporation (FDIC) coverage for each bank. “For example, when you think about your customers, a lot of small businesses have more than that left in their accounts,” Quinn said. “It's just good, smart business to protect it as much as possible.”
More peace of mind. Quinn points out that sweep accounts provide an additional layer of protection that doesn't necessarily show up on the balance sheet.
For example, imagine two identical startup companies that each have $1 million in cash on their books. The only difference between the two companies is that one uses sweeps accounts to store cash, while the other stores all of its funds in a company called Silicon Valley Bank. You wouldn't know it by looking at the financials, but as of March 2023, the first company would have been safely insulated from the local banking crisis that unfolded, while the second company would have been temporarily insulated overnight. It was at risk of losing 75% of its liquid capital.
Simple banking experience. Although bank approval must be obtained to enable the network, “customers will still be able to manage their funds using their primary business checking account,” Quinn added.
risk
Monthly fee. Monthly fees for Sweep accounts range from a minimum of $20 per month to $150 per month. Banks and brokerages may also charge a fee equal to a percentage of a customer's average daily deposits. The amount may vary depending on market conditions, but typically will not exceed the current federal funds rate.
Returns vary. Some financial services companies offer interest rates that closely match the 4% to 5% offered by the best money market funds in 2024. However, other financial services companies may offer significant returns well below these interest rate levels, some as low as 0.001%.
It is up to the bank or brokerage customer (or their financial advisor) to read the details of a sweep account, as there are more potential risks than the customer knows. “For example, cash lump sum programs can put depositors at risk if the bank fails,” Zimmerman said. In cash lump sum programs, depositors do not know (or have control over) where their funds are kept. “This means that if your broker sells your deposit to a bank where you already have an account, your deposit may be duplicated and therefore may not be fully FDIC insured. ,” Zimmerman said.
Customers who agree to hold cash in bulk programs may also face liquidity risk.
“If an intermediary bank were to fail or the broker-dealer's website crashed, customers would temporarily lose access to all of their funds,” Zimmerman said. That's because in a brokered deposit system, funds are not held directly in the customer's name, but in an omnibus FBO account.
As a result, if a customer contacts one of the program banks to get their money back, those banks will refuse to negotiate with the customer. “There, the customer has no direct relationship with the bank that holds the funds,” Zimmerman added. “In short, these programmatic banking solutions pose significant liquidity risks in the event of bank failure or website outage.”
Sweep accounts may be an unfamiliar concept to most banking and brokerage customers, but they're not difficult to manage if you do your homework. Apply these tips to your sweeps account experience.
Sign up yourself. Avoid the risks of bulk accounts by opening a bank account directly in your name. “There's no need for middlemen or brokers,” Zimmerman said. “Our modern cash management solution makes it easy for customers to open multiple accounts directly with their bank of choice by completing one application form.”
Please note the minimum balance requirements. In most cases, banks and brokerages automatically offer bulk accounts to their customers without requiring any special qualifications. “However, some financial institutions have minimum balance requirements for sweep accounts, or offer sweep accounts only to specific account holders, such as high-net-worth individuals or corporate customers,” says a financial planner at WinCap Financial. Michael Collins, founder of So before signing on the dotted line, check your bank or brokerage website for minimum deposit issues.
Don't forget to ask questions. Most banks and brokerages offer lump sum accounts, but don't expect them to be included automatically. “Sweep accounts may only be provided to clients who specifically request them,” Zimmerman says.
