Will 'Too Low' Cash Sweep Rates be Swept Away?
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The sweep rates that broker-dealers are paying clients for parking cash are coming under fire from customers claiming the payouts are "too low" compared to what the firms are earning off those assets. And regulators have also taken notice, Financial Advisor IQ recently reported .
Ameriprise , LPL , Morgan Stanley and Merrill Lynch are among the firms to have been hit with lawsuits from clients complaining of inadequate interest rates in cash sweep programs.
While a few firms have seemingly reacted by upping their rates, others are so far resisting the pressure.
Morgan Stanley recently opted to up the sweep rates it offers clients with advisor-led accounts. The change came after the wirehouse was hit with a lawsuit over its "too low" sweep rates. CFO Sharon Yeshaya declined to comment on an earnings call earlier this month when an analyst asked whether the pricing change was in response to regulatory pressure.
A few days earlier, Wells Fargo also said it would raise its sweep rates due to "changing competitive dynamics." Last fall, the bank disclosed that its cash-sweep programs were under review by the Securities and Exchange Commission.
Other firms have pushed back.
Last week, Ameriprise's CFO, Walter Berman, argued that the firm's sweep program, which offers rates as low as 0.30% for balances less than $5,000, is "totally appropriate and aligned."
Meanwhile, LPL CEO Dan Arnold said executives "feel good" about the company's bench of cash solutions, and Stifel CEO Ron Kruszewski said the firm is "very comfortable" with its rates.
A Boon for Money Market Funds
As the scrutiny has ramped up around bank and brokerage cash sweep programs, money market funds may reap the rewards, industry executives told Financial Advisor IQ's sister publication, Ignites.
Investors are taking notice that since the Federal Reserve began hiking short-term interest rates in 2022, yields for brokerage sweep programs ticked up only slightly. Over the same period, money market funds rates have soared.
Investors are looking at the disparity between the returns on money funds and brokerage cash sweep rates, said Debbie Cunningham, the chief investment officer of money markets at Federated Hermes, which managed more than $452 billion in money fund assets at the end of June.
The discussion around sweep rates functions as "an advertisement as to the realization of where true yields are in the market today, and I think that's beneficial to us," she said on the firm's second quarter earnings call, Ignites' Daniel Gil r eported .
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