3 things to do if you have cash in a brokerage account

Your brokerage account may be performing well so far in 2023 with stocks and bonds both providing solid returns. But you might not be able to say the same for the cash in your brokerage account.

The problem: Some savings accounts at brokerages aren’t paying an annual percentage yield (APY) as high as you can earn at the top online banks. In fact, many brokerages use your cash as a low-cost source of funds, earning profits on it for themselves but giving you only a small fraction of the potential interest you could earn.

“I do think that there’s a tendency to ignore the earning power of the cash that’s in your brokerage account,” says Greg McBride, CFA, Bankrate chief financial analyst. “It may be sitting on the sidelines for a while until you find another compelling investment option. You want it to be earning a competitive return in the meantime.”

Here are three things to consider doing if you have cash in a brokerage account to maximize your earnings.

1. Check the interest you’re earning – or not earning

First, check to see what interest your cash is currently earning.

Check your brokerage account statement, log in to your account or call your brokerage to see what type of account your cash is in and how it’s performing. Also confirm that your dividends are being reinvested; otherwise, they might be accumulating in a low-yielding account.

“They may think they’re in a money market fund because that’s traditionally where your cash in a brokerage has been parked, but a number of brokerages have somewhat slyly changed the default cash holding to an FDIC-insured bank account,” says McBride. “On the surface, that sounds great. But the reality is the yield they’re paying is a fraction of what you could get in a money fund.”

If the cash is in a savings account, be sure to check what APY you’re actually  earning.

Meanwhile, if it’s a mutual fund, it’s going to specify the name of the fund and its ticker symbol, McBride says.

“If that’s not what’s listed — if it just says cash or something like that — that’s an indicator that it might be in a very low-yielding bank account,” McBride says.

Also check to see if you’re receiving monthly interest payments. If you’re not, you likely aren’t earning interest.

2. Know whether the account is insured

Don’t confuse a money market mutual fund with an FDIC-insured money market account. A lot of people consider these two to be the same, but there are some subtle differences, McBride says.

Money market mutual funds or money market funds likely qualify as securities for Securities Investor Protection Corp. (SIPC) protection. They’re protected when held at an SIPC-member broker-dealer. It’s possible for these securities to lose value, and the SIPC doesn’t protect your shares against market losses, according to SIPC.org.

“While the bank account is federally insured and rock solid from a protection standpoint, money market funds are very stable as well,” McBride says. “Most big brokerage and mutual fund companies would move heaven and earth to preserve the one dollar net asset value on their mutual funds. There’s too much reputational risk and risk of capital flight if they break the buck.”

Money market funds are likely going to earn competitive yields that keep pace with changes in the market, McBride says. So, if there is money that you want ready to trade at a moment’s notice, this may be a good spot for that bucket of money.

At Fidelity, for instance, brokerage, IRA and HSA investments default to SPAXX, Fidelity’s Government Money Market Fund. As of July 28, SPAXX was paying a seven-day average yield of 4.96 percent according to Fidelity.

For the other money that you’re not going to invest, there are FDIC-insured savings accounts available that are earning more than 5 percent APY. You’re not likely to find those yields in a brokerage account savings account.

“The FDIC-insured bank accounts that most brokerages are offering are going to pay next to nothing because the brokerage is getting the return on your cash. Not you,” McBride says.

3. Find a better place for your emergency savings

Your emergency fund needs to keep up with inflation. Otherwise, it’s going to have lost purchasing power when you need to use the funds. This is why your emergency fund should be in a high-yielding online savings account, according to McBride.

“That’s where you’re going to get the best yield — even better than what you’re going to find on money funds,” McBride says.

A brokerage account is the perfect place for cash that you want to invest when you see a buying opportunity in the market. Some robo advisors pay a competitive yield on money that you want to be able to easily invest in the future.

But pass-through FDIC insurance – when you don’t have your money directly at an FDIC-insured bank – can be risky. The third party might never deposit your funds or the FDIC’s requirements for pass-through insurance might not be met, according to the FDIC.