What Is a Brokerage Sweep Account & How Does It Work?
As an investor, your money may not always be fully invested in stocks, bonds, mutual funds or ETFs.
Instead, there may be a time where your money is sitting in your brokerage accounts in cash.
You may do this when you think the market is overheated. At other times, you may have extra cash in your brokerage account after dividends are paid out.
Instead of letting your money sit and earn nothing, many brokerage firms use what is called a sweep account. Sweep accounts can help you earn money on your idle cash.
Here’s what you need to know about a brokerage sweep account and how it works. As always, check with your specific brokerage firm for how their products work.
What Is a Brokerage Sweep Account?
A brokerage sweep account is a more specific version of a general sweep account.
To help you understand better, it’s easier to start with the basics.
A regular sweep account
A regular sweep account is a type of account where money automatically sweeps into the account when it is not in use rather than letting it sit in cash.
This benefits the account holder by allowing them to earn interest on their money without much, if any, risk. Without a sweep account, the money may sit in cash where it earns no interest at all.
Typically, businesses use sweep accounts to keep their money accessible but earn interest when it doesn’t need to be used.
Sweep accounts can come with fees to use the service. Other providers may offer a sweep account as a benefit.
As with any product, make sure you understand exactly how your sweep account will work and what fees will be charged.
Only then can you determine if it is a good fit for you or your business.
A brokerage sweep account
A brokerage sweep account uses the same idea but in a slightly different way.
Rather than let your money sit in cash, your money normally is swept to a settlement fund based on how you set up your account.
Most often:
These funds are an investment product such as cash management funds or money market mutual funds. They may also be cash sweep accounts or deposit accounts.
You’ll need to check your brokerage account options, settings or preferences to see where your money goes. This can also help you determine your sweep options with your brokerage firm.
If you do decide to use a brokerage sweep account, they generally work as follows:
Holds uninvested funds
Whenever you deposit cash into your brokerage account or you get dividends that you choose not to reinvest or get a check for, it may get swept to the sweep account.
The same thing happens when you sell an investment but don’t immediately choose a new option to invest in.
Accessible for investing
When you’re ready to buy more investments, you can often use the money in your sweep account or settlement fund.
This is typically a faster option than transferring money into your brokerage account from a separate bank account.
Depending on your particular brokerage and settlement fund, you could earn a decent amount of interest.
If you compare a sweep account to a non-interest bearing checking account or a low-interest checking account, the difference can be huge.
Fees
Be careful, though.
Brokerage sweep accounts may come with fees. If your brokerage sweep account charges fees, make sure the earnings outweigh the costs.
Each brokerage may offer different interest rates or returns on their sweep account investments. While one firm may have an amazing sweep account, another firm’s sweep account may not be worth using.
You likely want to compare your returns against transferring your money to a savings account or money market account.
If there are high fees to use a sweep account, transferring money out of your brokerage account may be worth the hassle.
The Purpose of Sweep Accounts
The main reason to use a sweep account is to avoid letting your cash balance sit idle.
If your cash sits and isn’t invested in any way, it may earn nothing. It just sits there earning no interest and no returns.
Instead:
Sweeping your cash into a sweep account or other type of account or fund gives you the ability to have your cash grow while you aren’t using it for something else.
You aren’t likely going to get rich leaving your cash in a sweep account, but every penny of interest helps your net worth grow.
Some sweep accounts offer returns that are similar to a high-yield savings account. This allows you to keep your money at your brokerage.
By keeping money at your brokerage, you don’t have to wait for transfer delays.
If you sell a position and wanted to transfer the money to a bank deposit account, it might take a couple of days to transfer.
Then, when you want to buy again, you’d have to transfer the cash back to your investment account.
Using a brokerage sweep account avoids this hassle and delay in earning interest or returns.
Should You Keep a Large Amount in a Sweep Account?
Keeping a large amount of money in a sweep account probably isn’t the best idea.
That said:
It can be useful in some cases.
Money in a sweep account may earn some interest or returns, but the returns are likely small. You won’t hit an investing home run in a sweep account.
You’ll likely generate higher returns over the long run by having your money invested.
Keeping large sums of money in a sweep account can have its place though.
If you’re convinced the market is going to decrease in the near future, selling investments and keeping money in a sweep account can allow you to quickly move back into an investment position after the price drops.
This strategy isn’t guaranteed to work, though.
The market could continue moving higher.
In this case, money sitting in a sweep account may earn much less than if it were invested.
If you do decide to keep a large amount of money in a sweep account, make sure you understand how and if the money is insured before you do it.
Are Sweep Accounts Insured?
Depending on your brokerage and the type of sweep account you use, your money may be insured.
If money is swept into certain types of accounts, such as money market deposit accounts or savings accounts, it may be FDIC insured.
FDIC insurance typically covers up to $250,000 per account. Some firms, like Fidelity, make cash sweeps to multiple financial institutions or affiliated banks.
This allows them to offer you an even greater amount of FDIC insurance on your cash by keeping it with many program banks. This is especially important if your cash balance exceeds the $250,000 insurance limit.
On the other hand:
If cash is swept into a money market fund, it may not be FDIC insured. But, it is likely covered by SIPC insurance.
SIPC insurance protects up to $500,000 in securities and cash, including up to $250,000 in cash.
The coverage does not apply to losses due to decline in value of invested securities.
Sweep Accounts Versus Other Alternatives
Using a sweep account with your brokerage firm isn’t your only option.
Some sweep accounts don’t offer interest rates or returns that can beat your other options.
If you love your brokerage account but their sweep accounts don’t offer great benefits, consider using one of the following alternatives.
Money market accounts
A money market account is a type of deposit account. These accounts are often FDIC insured up to $250,000.
Depending on the institution you use, their interest rates may be lackluster or fairly decent. Shop around to find an institution that offers a money market account with a decent interest rate.
Make sure they don’t charge a ton of fees and offer any other services you need before you open an account.
Money market funds
Money market funds are easily confused with money market accounts but are not the same thing.
Money market funds are not usually FDIC insured. That means they may lose value.
Even so:
Many money market funds offer stable returns except in rare cases. You may be able to purchase a money market fund through your brokerage account.
Make sure you understand any fees involved before you purchase a money market fund. Fees can eat away at your returns, especially if you make frequent trades with money market funds.
Savings accounts
A savings account can be a decent alternative that is FDIC insured up to $250,000. While savings accounts at brick-and-mortar banks normally do not offer great interest rates, online high-yield savings accounts can.
Many online-only banks offer extremely low fees and high interest rates due to the fact they don’t have the overhead costs associated with running a branch network.
Search for a high-yield savings account that offers the services you need while keeping fees low.
Conclusion
A brokerage sweep account can help your money earn interest or returns rather than sitting idle.
It is a convenience your brokerage firm may offer, but make sure the benefit outweighs any fees involved.
If you have any questions, contact your brokerage firm to see how its sweep account offerings work.
