Any investment account at a brokerage usually has an associated cash account in which proceeds from sales and dividends are deposited, usually in the form of a money market fund. According to this free Wall Street Journal article, investment banks are purposely moving investors’ cash funds into accounts that earn less than typical money market funds. This, of course, allows the banks to make more money off your account.
The good news is that there are options. Many brokerages allow you to request better accounts for holding cash. For example, the default option at E*Trade is to keep your cash in a deposit account earning 0.40% interest. They do, however, offer tax-exempt money market funds yielding up to 1.57%. That rate may not compete with the likes of Capital One 360 and Emigrant Direct after taxes (I haven’t done any calculations), but it is certainly a more favorable option than the default sweep account offered.
Updated May 23, 2013 and originally published August 31, 2005.
I live in a high tax state, so I prefer the muni sweep for NY State.
NYC Money
When I opened my brokerage account with Fidelity the first thing I did was ask what happened to the money while I was still deciding on investments. They pretty much told me the same thing – holding account, .40% interest yada yada. Thankfully I had the presence of mind to ask if that’s the only option and now my cash sits in the Fidelity Muni money mkt fund until I am ready to move it. 1.98% (equiv to 2.98 taxable) is not a lot but it’s better than .40
I’ve got the bulk of my money at ameritrade advisor. The money market option is pathetic. They’re making money on the spread. Good thing I keep less than 1% of my portfolio in cash.
JC