Fidelity today highlighted its long-standing policy of automatically placing excess client cash in retail brokerage and retirement accounts into its government money market fund, comparing the yields earned there to the default sweep accounts at other brokerages.
Brokerage firms typically place the cash portion of a client’s portfolio into a so-called “sweep” account, usually with an affiliated bank, that earns the client very little, with yields hovering around .04% to .13% at the major brokerages for small amounts of cash.
Since the third quarter of 2015, Fidelity has been automatically defaulting client cash in retail brokerage accounts to its Fidelity Government Money Market Fund (SPAXX), which recently posted a 7-day yield (the average yield of the fund’s portfolio over the past seven days) of 1.91%, as of August 5. Last May, the firm started doing the same with cash in retail retirement accounts. The fund invests in a portfolio of U.S. government securities, including agency fixed and floating rate securities and government repurchase agreements.
"Fidelity changed the automatic default selection for brokerage cash to SPAXX in Q3 2015, and retirement cash to SPAXX in May 2019. What we’re doing today is shining a light on an industry practice that investors should be aware of to avoid potentially leaving money on the table," said a Fidelity spokesperson.
While Fidelity has no account minimums for the option, clients do pay the .42% expense ratio for the fund, cheaper than the average .61% fee for U.S. government money market funds, according to Crane Data, which tracks money market funds. The fund has $129 billion in net assets.
For advisors who custody at Fidelity, there is no change to the cash sweep default. “Our custody clients have multiple cash options available for their customers, including money market funds and our FDIC-insured Bank Deposit Sweep Program. Advisors have told us that they want the ability to choose the cash option that is right for their clients,” said Fidelity Clearing and Custody Solutions’ spokesperson Rachel Shaffer.
“You’ve seen brutal competition in the brokerage marketplace,” said Crane Data’s Peter Crane. “Almost all of the others are sweeping to FDIC accounts with miserable yields.” Most brokerages have eliminated the option for directing brokerage cash into a money market account at sign up. Many brokerages have eliminated the option for sweeping cash into money market accounts. Firms profit from the sweep accounts by using the funds for higher yielding purposes while paying brokerage clients a pittance on the deposit.
E-Trade, for example, defaults to a cash sweep account that yields .07%. In its most recent quarterly earnings report, E-Trade has some $61 billion in cash and deposits in retail accounts.
TD Ameritrade’s default swap yields anywhere from .04% to .43%. Schwab pays .18% in their cash sweep account for amounts under $1 million. To be sure, money market funds don’t have the same protections that bank sweep accounts do. They aren’t insured by the Federal Deposit Insurance Corporation, and returns are not guaranteed, though U.S. government securities are considered a safe investment option akin to cash.
“Some firms have removed the option of a higher yielding money market fund for their cash sweep, thereby forcing investors to take additional steps to get a better rate for their cash,” said Kathleen Murphy, president of Fidelity Investments’ personal investing business in a statement. “It is unfortunate that millions of investors lose out on having money in these accounts earn more for them based on current industry practices.”