Fidelity is removing an option for RIAs to have idle cash in clients' custody accounts automatically swept into high-yielding money market funds.
While the brokerage firm has had a policy of automatically placing excess cash in retail brokerage and retirement accounts into its government money market fund, SPAXX, its RIA custody clients had the option to make that the default destination in the account, instead of using its FDIC-insured Bank Deposit Sweep Program.
But starting later this year, FCASH, Fidelity’s core cash option, will be the only automatic cash choice available for all new brokerage accounts opened by custody clients. FCASH is the firm's Taxable Interest Bearing Cash Option, essentially a credit facility with Fidelity payable to the client at any time.
That means RIAs will no longer have the option to automatically have cash, either deposited into the brokerage account or generated from sales of securities, put into the higher-yielding money market funds. Existing custody accounts and retirement accounts will not be impacted, and clients will have the ability to pull cash to trade from other money market funds if their FCASH account is depleted.
Even with the change, Fidelity still pays considerably more for idle cash than competitors. FCASH currently yields about 2.26%, higher than average for cash deposit accounts, but still less than the almost 5% yield of most money market funds. Barron's first reported the news of the change.
According to Jeff Schmitt, a research analyst at William Blair, this is similar to how Schwab phased out the use of money market funds in 2018. Schwab’s current bank sweep rate is only 0.45%.
“By effectively lowering its sweep rate, this reduces an advantage Fidelity had on Schwab in its custody business, although its sweep rate remains materially higher,” Schmitt writes in an analyst report. It doesn't mean advisors can't use money market funds, but they'll have to manually move the cash into and out of the fund.
“Clients can continue to shift sweep cash into money market funds to earn higher yields, although this lowers the convenience of trading as this money would have to move back into sweep accounts if it were to be used to purchase another security. This can be cumbersome for independent advisors using Fidelity as a custodian.”