Gone are the days when cash was trash. Now, it’s a valued asset that can earn 5 percent a year. That’s why it’s important to make sure the ready money in your brokerage account is earning a competitive yield.
A brokerage sweep account, sometimes called a core or settlement account, holds your uninvested cash. When you sell a security, the proceeds are placed in the sweep account. And when you buy a security, cash in the account pays for the trade. It all happens automatically.
But here’s the rub: Some brokerage firms park your cash in accounts with good yields, while others put it in holding places with not-so-good yields.
Of course, sweep accounts are supposed to be temporary holding places, not cash management accounts. You can’t write checks or pay bills from a sweep account, for example. “It’s a settlement account, for the liquid cash you have at your brokerage,” says Greg McBride, Bankrate.com’s chief financial analyst.
If your brokerage firm offers a government money market fund as its default sweep account, you probably don’t need to worry about your settlement account yield or make a change. But if your brokerage account cash isn’t earning 4 percent or better, it may pay to consider alternatives.
Finding the right place for your idle cash isn’t just about getting the best yield, however, says Peter Crane, president of money-fund-tracker Crane Data. Other factors matter too, such as how soon you plan to use your cash and how much of it you have. Keep these tips in mind before you move your money out of a sweep account.
Some firms let you choose a different default sweep account—a bank account, say, or a government-debt or muni-bond money market mutual fund. If your firm doesn’t (and you don’t like its default option), you’ll have to move cash on your own to a competitive money market fund.
Make sure it’s accessible. Where you hold your money matters, depending on how you plan to use it. “Convenience is the most important factor,” says Crane. Funds you want to put to work immediately in the event the stock market takes a dip are best held at the ready in your brokerage account, even if that’s in a low-yielding sweep account. Otherwise, “you could miss a buying opportunity of a lifetime,” says Crane.
The caveat is how much money you’re sitting on and how long you plan to hold it. If it’s $100,000, $20,000, or even $10,000, a 5.0 percent yield over one year can be meaningful ($500–5,000). Unless you’re planning to invest the whole pot in short order, it may be worthwhile to shift some of the cash to a higher-yielding money fund.
