Brokerage Sweep Accounts Offer Safety but Awful Return

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Millions of investors have parked their cash in brokerage sweep accounts. In most cases, this is a bad idea.

As stock markets have crashed, millions of investors are holding a significant percent of their portfolio in their brokerage sweep accounts.  While this is good for financial companies, it's terrible for investors.  Sweep accounts offer rates of return as low as .01%.  For banks, the accounts are a bonanza.  They reinvest the money parked in these accounts at significantly higher rates, earning billions per year.

So, how do you make sure that you get a decent rate of return instead of funding your bank?

Move the money out of your brokerage account temporarily until you are ready to reinvest.  High yield savings and money market accounts on the BestCashCow rate table pay above 3% APY.   If you want to park significantly more than the FDIC limit of $250,000 per person per bank, then you may want to consider a CDARS program.

The disadvantage of getting these higher rates is that you'll have to move the money out of your brokerage and it can take 3-4 business days or longer to move the cash back in.  If you don't need immediate access to your money, it's not a problem.  But if you want to be able to transfer and trade, the time limit might be a drawback.

A solution to the access problem is to look  for a companion savings account with your broker.  Online stock brokers like Etrade and Charles Schwab offer relatively high savings accounts that provide ffast and easy transfer between brokerage and bank.  Etrade is currently paying 1.95% APY while Schwab is paying 2% APY.  BankDeals has a good review of the Schwab High Yield Investor Savings.  Be sure to ask your broker about higher yielding options 

Sweep accounts were never meant to be a place to park money for long periods of time.  Your broker has no incentive to suggest you move your money elsewhere but if you ask they should be able to provide a better option.  If they don't, at least you now know there are higher yielding places to invest your cash.

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