Never has cash been so controversial. Merrill Lynch, Wells Fargo, LPL, and many others are facing lawsuits over how they pay interest on their clients’ cash deposits. The hoopla is over cash sweeps and whether a brokerage client is entitled to the highest rate available. The answer is that it depends. 

A dozen years ago, when interest rates collapsed, the interest earned in a money fund was insufficient to support its administrative fees. Brokerages bellied up to the bar and offered customers positive returns in their money funds of 0.01%, despite the actual return being -0.50% or so. The brokerages ate the losses. Imagine the possible client vitriol for offering negative returns on cash. The brokerages mitigated their financial damage by sweeping cash balances to their banks instead of the money funds, where the math was healthier, but investor returns were still at least barely positive. Those banks re-lent the money for a positive return for themselves and sidestepped the admin costs of running the money funds. In 2019, trading commissions also dropped to zero at many discount brokerages like Fidelity and Schwab. There is only so much blood in that turnip. The brokerages were between a rock and a hard place, and client revenue was dropping like a stone. It is important to note that the brokerages only removed the automatic sweep feature to money funds; they did not suspend or prevent the use of money funds. Neglect on the part of investors and brokers is the only excuse here, not brokerage nefariousness.

When interest rates leaped in 2022, the brokerages kept those sweep-to-bank practices in place. The revenue earned from cash balances at their banks helped them recover prior losses from clients who now neglected to pay attention. It would be a tough argument that clients were somehow entitled to higher returns when all along the brokers at any brokerage and clients who operate solo could have simply asked for a money fund purchase or do it themselves online. Lawsuits are now flying from people who are suddenly waking up from their slumber. At Segment, we have long been manually sweeping cash balances to money funds, and our clients are now $15 million ahead. Have those just now realizing the math on this had their head in the sand?

Now, I can get on board with claims that advisory accounts have a very different set of entitlements and allegiances than simple brokerage arrangements. Clients who pay fiduciary fees are entitled to better treatment, even if a non-fiduciary broker is providing the advice. I think an advisory relationship requires higher care, and presumption of allegiance, despite the fact that a brokerage still has conflicts of interest and less strenuous regulations in providing advisory and brokerage services under the same ownership. Our firm, Segment, has for years devoted significant man-hours to scouring and sweeping client cash into and out of money funds every day to pick up these 5% returns and still cash the checks clients write with no notice. 

Surprisingly, Schwab has never impeded us in our persistent scrubbing of $100million+ in client cash balances. For years, this has earned our clients between $ 4 million and $ 5.2 million of annual incremental return versus the standard sweep practice of our primary custodian, Schwab. Those who are not paying attention are missing out, which is not Merrill’s (et al) fault or problem. Roughly half of Segment’s annual client management fees are offset by this “free interest.” If Goldman is keeping that for themselves, you can thank FINRA rules and investor torpor that allow it.

Despite the many egregious brokerage practices that I highlighted in my book Foolish: How Investors Get Worked Up and Worked Over by the System, I do not find this brokerage behavior to be one. They are entitled to earn revenue, and if a client or advisor’s neglect is the source of that revenue, the brokerage is not to blame.

Investors waking up to these realities should not ask what they are owed from their own prior neglectful behavior but should ask themselves instead why they have not hired a separate advocate to navigate these complicated issues on their behalf. Overconfidence and presumption are top of the list. This is more evidence that when it’s all said and done, the independent fiduciary advisory business will be the last man standing.

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