The traditional rule-of-thumb has been that wealth clients hold 5-7% of their assets under management (AUM) in their cash sweeps account. This is the leftover uninvested cash that’s swept to a FDIC-insured bank deposits account overnight—generally enough to cover fees and trades. In low rate environments, sweeps might also hold a little extra as an alternative to nominal rates being offered by other cash such as deposits and money funds.
Even with rates elevated, many wealth-management firms (and their clients) still look to sweeps for just that, the leftovers, crediting the overnight cash with only one paltry basis point. Those are slim pickings, and as a result, these firms have seen a runoff in sweeps, with clients often keeping only the bare minimum in these accounts—as low as 2% of AUM.
Other firms, however, particularly those without a bank affiliate, are beginning to use cash sweeps to deepen their share of wallet with clients. They’ve built sweeps products with the capability to move money, pay bills and deposit checks through mobile, thereby rivaling traditional savings products. But attracting these funds comes at a cost: Instead of paying the industry average 64 bp, the top quartile of cash sweeps is paying an average 268 bp (see chart), and several digital-first broker-dealers are exceeding 350 bp. With yields like these, sweeps are getting a second look.
But as firms begin to pay up in sweeps, they sacrifice the massive spread between overnight rates they’re paid from their partner banks and the yield they’ve been giving their clients. As a result, they’ll need to rethink their pricing discipline and, as banks do with deposit products, strike the right balance between growth and margin.
Quartiled Sweep Rates* | Jan ‘22 – Jan ‘25
Source(s): Curinos Standard Rate Data | Note(s): Simple averages displayed | *Quartiles are calculated dynamically, based on posted rate for $100,000 in cash
