A few weeks ago, I noticed something important missing from the message section of my online broker: dividend statements. It turns out that when I had opened a new account, I had neglected to indicate that I wanted any unused funds in the trading account to be swept into a money market account at the end of each day.
It's been more than two years since I last wrote an article on sweeps. This occurs when unused money from your brokerage accounts is swept into money market funds, putting that unused money to work earning dividends. I thought it might be time to address the topic again.
It's important to understand how your brokerage addresses these issues, preferably before you choose the brokerage. First, not all brokerages offer this option, although an Internet search using the terms "brokerage" and "sweep" turned up tons that do. In addition, those that do sweep funds may not offer clients the choice of opting in or out. In addition, a brokerage might change the third-party bank to which funds are swept, with the subsequent new interest rate significantly different than that previously received on swept funds.
As early as 2005, the NYSE argued with the determination of some member organizations that the original customer agreements allowed them to implement or change a cash sweep plan without requiring additional consent forms. In addition, the NYSE wanted member organizations to inform clients if they were paid for sweeping funds into a particular third-party bank. They wanted customers to be advised if there was a significant difference in the interest rate they might receive on the swept funds and that they might receive in a money-market account.
The NYSE wanted customers to know about another potential conflict. Those customers who had accounts large enough that funds in excess of $100,000 needed to be aware that if the brokerage planned to sweep funds in excess of that amount into a single bank, FDIC coverage would be affected on those funds above the $100,000 level. In addition, if the third-party bank accepts customers other than the brokerage's sweep account, prior accounts at that bank may impact FDIC insurance coverage, too.
Back in 2005, the NYSE asked that member organizations prominently post information about sweep plans on their websites, update that information frequently, and also mail information if they had no websites. The NYSE wanted representatives at each brokerage that offered sweep plans trained to discuss the impact of those plans or choices within the plans with customers.
At that time, a quick check of several online brokerages showed me that no such information was prominently displayed or readily found on searches of major online brokerages. Has anything changed in the more than two years since that initial article was written? My brokerage did email me a few months ago when a change was made, informing me of the potential change. Check your brokerage's website to find out.
This is particularly important for those traders who might need tax-free income or those who are particularly concerned about having FDIC coverage. For example, those concerned with that FDIC coverage and who typically have more than $100,000 in excess cash in their brokerage accounts would want to ensure that their brokerages sweeps cash into more than one third-party bank or into the same bank in separate capacities.
If you have any questions about these issues, call your brokerage's customer
support and ask for someone to explain the implications of the various choices
the brokerage might offer for sweeping those unused funds. Then call your
financial advisor to ensure that the cash sweep plan you're considering is right