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The Federal Reserve has raised its benchmark interest rate nine times since the beginning of 2022. This makes mortgages, credit cards and other types of debt more expensive. But it also drives up the yields paid by bonds, certificates of deposit and even brokerage accounts.
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Many brokerages keep uninvested cash in “sweep accounts” that automatically transfer, or “sweep,” the cash into interest-earning accounts at the banks they work with.
Today, some brokerage accounts pay more than 4% interest per year on non-invested cash. With this in mind, some investors may be wondering whether it is a good idea to keep their savings in a sweeps account with a brokerage.
What is the interest rate in sweep account?
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From the Great Recession to early 2022, sweep account yields were negligible, and many accounts still yield less than 1% a year. But more recently, some brokerages have launched money market- and CD-linked sweep accounts that yield anywhere from 1.5% to 5.1% per year.
Some of these interest rates are competitive with those paid by high-yield savings accounts. But according to Kashif Ahmed, a professor of finance at Suffolk University in Boston, non-money-market sweeps accounts typically pay much less than comparable savings accounts.
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“With the recent implosion at Silicon Valley Bank, First Republic and so forth, money market accounts have suddenly become very hot,” says Ahmed.
“Some are offering yields as high as 4%, but brokerage cash accounts rarely pay that high,” he says.
‘Cash is the cool kid on the block’: High-yield savings accounts, Treasury bills, money market funds, and CDs — here’s where your cash can earn up to 4.5%
Is Cash in a Sweep Account FDIC-Insured?
Christine Centeno, a certified financial planner and founder of Simplicity Wealth Management in Richmond, Virginia, says that some brokerages put uninvested cash into Federal Deposit Insurance Corporation-insured accounts. This means that in the event of a bank failure, the government will reimburse account holders up to $250,000.
But some brokerages do not hold funds in FDIC-insured accounts, and some offer a choice between insured and uninsured accounts.
“Make sure you see exactly what you are choosing when opening an account,” says Centeno.
Ahmad adds that sweep account dollars can only be FDIC-insured if and when they are deposited into an FDIC-insured account at a participating bank. They are not covered by the FDIC when they are going to the bank.
“A brokerage account is an investment account. It doesn’t automatically come with FDIC coverage. It comes with SIPC coverage,” says Ahmed, referring to the Securities Investor Protection Corp.
Both the FDIC and SIPC have cash coverage limits of $250,000 per account, and most — but not all — brokerages are SIPC members. Read your brokerage’s fine print to see what type of insurance, if any, is offered for the various sweep accounts.
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money market account vs brokerage sweep account
The main difference between a money-market account and a brokerage sweep account is what features they come with by default.
Centeno says that many brokerage accounts may offer check-writing features and even support for ACH — Automated Clearing House — direct deposit or electronic payments, but only if the account holder asks for them.
“You have to choose those things,” she says. “A lot of times they don’t come as default. I could see someone getting into a situation where they installed it and didn’t realize they didn’t add extra features.
Money market accounts, on the other hand, typically come with check-writing and ACH support by default, and they typically offer competitive interest rates. Some currently pay upwards of 4.75% per annum.
Other Ideas About Sweep Accounts
Centeno also says that the process of transferring money from a sweep account is not necessary immediately.
“Let’s say you’re trying to pay a bill—it needs to be out of money market funds and actual cash, and then you can AHH it,” she says.
Centeno says you should look at the settlement period for defaulted funds in your sweeps account to get an idea of how long it will take for the money to reach the account.
Ahmed says that if you’re working with a financial advisor, they may charge fees on your brokerage account balance, including cash in your sweeps account.
“If your direct deposit comes in there from your pay, and you use it to pay for your groceries, utility bills, your mortgage, etcetera, then you shouldn’t pay [advisor] charge for that, because they’re not really managing that much money,” he says.
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Should You Use a Sweep Account for Savings?
Some brokerage sweep accounts offer higher yields and bank-like features, but Centeno says they’re not a good replacement for high-yield savings accounts.
“If we’re talking emergency reserves, I really don’t see any reason to keep them at a brokerage,” she says.
Ahmed agrees that sweep account is not a substitute for a real bank account. “It may look like a bank account, it may even bark like one, but it’s not one,” he says.
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Sam Taube writes for NerdWallet. Email: [email protected]. Twitter: @samuel_taube.