This is a great article, unfortunately, if you don’t subscribe to the Journal, I don’t believe you’ll be able to read it. I’ll summarize, but if you want to read the whole story shoot me an e-mail and the journal allows me to e-mail the story from their webpage.
I’ve reported on this little scam before and it really irks me……what irks me even more is that now the custodian I am using is doing it. In fact, there is not a single major custodian not doing what I am about to tell you, it really is sick.
Idle Cash…….what to do with it? It used to be that your cash would automatically be swept into a money market account at your brokerage firm. Sometimes the brokerage account had a decent rate, sometimes it had a great rate. For the most part, most brokerage firms offered a competitive rate, though not the best rate (firms build in extra fees, thus you get a slightly lower rate than you would at a Vanguard).
Brokerage firms figured out a way to screw their customers even on money markets. How, you ask? Start a bank.
In short, the brokerage firm starts a bank and then offers a “new” money market account to you that is “bank-insured”. Sounds great, right. It automatically becomes your new default money market account. The problem is that the rate is not competitive at all, in fact it usually earns about what a savings account earns at a bank (go figure). In some cases people have seen their rates fall from the 4-5% range down to less than 2%. The brokerage firm bank then uses your money to lend out to the banks borrowers at much higher rates.
They’ve gone from taking perhaps .50% of your money (the expense of the old money market fund) to taking taking about 3%, plus the interest they earn by lending YOUR money out. Does this sound like something that is in YOUR BEST INTEREST? It certainly isn’t, but then again, brokerage firms are required to put your interest first, in fact they can’t. A brokerage firm owes its first duty to their shareholders, not you.
My custodian, TD Ameritrade, now offers a bank sweep account, I don’t like it. Although in their defense they don’t require you to use it and I don’t. I’ll keep small amounts of money in their normal money market fund and large amounts I’ll drop into the Vanguard Prime Money Market account. This little story demonstrates how little things can cost you a lot of money over time and why it pays to have a Fiduciary working on your behalf.
Scott Dauenhauer, CFP, MSFP, AIF