What happens to idle cash in your portfolio? Sweep accounts, explained

You might not think about the idle cash in your brokerage account very often. But behind the scenes, your money may be earning your brokerage company a lot more interest than it is earning you.

Cash parked on the sidelines of your investment portfolio is still liquid, so you can access it anytime. This can make it seem like your money “isn’t doing anything.” But it is.

For the brokerage company and its affiliated banks, your money is earning relatively high interest. Yet many major brokers are returning less than 0.2 percent of that interest to customers.

A growing number of financial firms are coming under fire — and facing lawsuits — for their behind-the-scenes cash sweep accounts and the extremely low yields paid to customers, especially as the federal funds rate increased in recent years and banks presumably earned more interest.

By understanding how cash sweeps work, you can make informed decisions about your investments and ensure you’re getting the best possible return on your money.

Here’s what you need to know. 

What is a cash sweep account?

Many brokerage firms offer a service known as a cash sweep, which automatically collects and deposits uninvested cash from your account into affiliated bank accounts, where the brokerage earns interest on it.

In other words, many brokerages use your idle cash as a low-cost source of funding for their operations. Interest they earn from swept funds can be substantial, especially when compared to the rates you, the individual customer, receive.

For example, in March 2024, Charles Schwab reported about $399 billion in client sweep cash balances — a huge sum of money to earn interest on. In fact, Charles Schwab generated nearly half of its $18.8 billion in revenue in 2023 from net interest income, according to Barron’s. Net interest income primarily comes from the interest earned on uninvested client cash balances. 

While brokerages may pass a sliver of this interest back to you, they keep the lion’s share for themselves. Brokers can put the profits to work in various ways, such as offering you lower commissions, free trades or discounted fees. 

Low-yielding cash sweeps have become more common in recent years, as several large brokers have transitioned clients from money market funds to lower-yielding bank sweeps. While some companies, such as Fidelity, still offer a money market sweep program, most full-service brokerage firms offer only a bank sweep program. 

Can you earn interest from uninvested cash in your brokerage account?

Some brokers pay interest on uninvested customer funds, but not all. Those that do tend to offer negligible rates of return, often less than 0.2 percent, at a time when the federal funds rate — or the rate at which banks lend money to each other — is still well above 4 percent. 

For example, E-Trade offers just 0.01 percent APY on brokerage accounts with less than $500,000 in cash. J.P. Morgan brokerage accounts earn the same 0.01 percent through its deposit sweep program, regardless of balance size. Even Charles Schwab, which earned its spot on Bankrate’s list of best brokers, offers just 0.2 percent APY on uninvested cash in brokerage accounts. 

This wasn’t an issue a few years ago, when the federal funds rate was near zero. But when the Federal Reserve began hiking interest rates in 2022, many brokers’ cash sweep yields for investors failed to keep pace. 

Some companies offer more attractive rates, though. 

Fidelity, for example, provides the Fidelity Government Money Market Fund (SPAXX), yielding 4.94 percent as of Sept. 12, as the default on uninvested cash in brokerage accounts. And Fidelity IRA customers with cash balances less than $100,000 can earn 2.47 percent APY as of Sept. 25 on uninvested cash through the broker’s FDIC-insured deposit sweep program. 

Meanwhile, Robinhood offers a 4.5 percent APY through its brokerage sweep program as of Sept. 26 — but only for Robinhood Gold subscribers. Everyone else receives 0.01 percent. 

And Interactive Brokers offers interest rates on uninvested cash, but you’ll need a large portfolio with lots of idle cash to notice a meaningful difference. A client with $320,000 in net assets and $80,000 in brokerage cash can earn a rate of 3.79 percent APY as of Sept. 26. But that rate drops to zero if you have $20,000 in net assets and $5,000 in uninvested cash. 

Big brokers face backlash over low cash-sweep-account rates

Several major wealth management firms — including Morgan Stanley, Wells Fargo and Charles Schwab — are facing lawsuits over their low-yield cash sweep accounts. These lawsuits accuse the brokerages of violating their duty to act in the best interest of their clients. 

Consumers in the suits allege that the brokers breached their fiduciary duty by funneling client money to affiliated banks and negotiating one-sided deals that pay minuscule interest rates to clients. As the Federal Reserve raised interest rates, the gap between what clients earned and what brokers pocketed widened significantly.

Lawsuits were filed against at least eight financial firms between late June and early September 2024, according to Bloomberg Law. 

While the outcome of these lawsuits is uncertain, the legal action is shining a bright light on the murky practices behind cash sweep accounts. 

3 tips for managing cash in your brokerage account

Leaving cash on the sidelines of your investment account can be tempting. What if there’s an emergency? Maybe you want a sizable pot of cash at your disposal if a fantastic buying opportunity pops up. Or maybe you rolled a different account into your brokerage, and you’ve just been a little lazy about investing it. 

But remember, the point of a brokerage account is to hold stocks, bonds and other investments, not to park loads of cash.

Here are a few ways to get more from your uninvested cash. 

1. Know the interest rate

You can find out the type of account your cash is in and how it is performing by checking your brokerage account statement, logging in to your account or calling your brokerage company. 

Additionally, make sure that your dividends are reinvested automatically to avoid them accumulating in a low-interest account. If you’re not receiving monthly interest payments, you are likely earning little or no interest on your cash.

2. Explore other sweep program options

Some brokerage firms offer higher-yielding money market funds as an alternative settlement account option to bank cash sweeps. Fidelity offers these kinds of cash sweeps by default.

Similarly, at Vanguard, customers can choose the Vanguard Federal Money Market Fund as their brokerage settlement option, yielding 4.89 percent as of Sept. 25. 

It’s worth checking to see if your brokerage offers a similar money market cash sweep account. Just keep in mind that money market funds charge expense ratios, which can reduce your returns over time. However, the expense ratios are generally low, ranging from 0.11 percent to 0.42 percent for the aforementioned Vanguard and Fidelity funds, respectively. 

3. Put rainy day money somewhere else

Keeping some cash in your brokerage account can help you seize buying opportunities, but most experts do not recommend holding more than 2 percent to 5 percent of your portfolio in cash. 

If you’re holding more cash than necessary but still want to keep it easily accessible and safe, consider transferring it to alternative options that offer a higher interest rate. High-yield savings accounts have become a popular choice for consumers looking to benefit from higher interest rates. 

Cash management accounts, available with no minimums at many brokers and robo-advisors, also offer attractive yields on par with high-yield savings accounts. 

By optimizing your holdings, you can maintain easy access to your money and get your cash to work harder for you before additional interest rate cuts go into effect. 

Bottom line 

Cash sweep accounts are a common practice among brokerage firms. While these programs offer easy access to your money and are often FDIC-insured, it’s worthwhile to understand the profit motives of brokerage companies. By staying mindful of the amount of cash you keep on hand and exploring alternatives, you can ensure all your money is netting the best return for you — not your brokerage company.