Fidelity reveals it switched its RIA sweep default to a much lower-yielding FCash product, on new accounts, during Schwab's very pre-occupied week; new yield still beats Schwab's by about 300%, but advisors are sure to be irked
The No. 2 Boston custodian will jack up the revenue it gets from RIA custody because it can pay their clients much less for cash -- as long as RIAs are too lazy to do cash sorting.
6 min read- Fidelity reduced sweep account yields for new RIA clients into a lower-yielding FCash product.
- Advisors face lower client returns or increased manual effort to maximize sweep account earnings.
- Fidelity's new rate still beats Schwab's default yield by roughly 300 basis points.
- Change impacts new non-retirement accounts, creating opportunity for cash management solutions.
Brooke's Note: I spent a record amount of time on the phone this week with RIAs seeking guidance on what RIA custody unit they should move assets to based upon the very unique needs of their firms. What all of them wondered was which custodian is really going to do whatever it takes to make it all work. I will say that not one of them brought up sweep default account yields. That said, I can say that it's not a small issue. It's the one part of the return that an RIA, at least short-term, has control over – and that matters. The big issue, as always, was service, BTW.
Fidelity Investments delivered some bad news this week to RIAs, but it may have been fortuitously muted by all the drama surrounding chief rival Charles Schwab & Co.
Amid that cloud of Schwab dust over 2,000 layoffs, Fidelity slashed the yield it pays on sweep balances managed by its RIA clients on behalf of their investors – a move advisors are certain to dislike. Either the RIA must accept the ding on its client's returns, or it must work harder to assure the sweep balances are immediately – often manually – moved to a higher yielding money instrument.
It only applies to new non-retirement accounts.
The Boston giant will soon start directly sweeping cash from RIA-managed accounts into a money market fund with a return to end-investors that's nearly 300 basis points below its current 500-basis-point rate.
For Fidelity, it is a chance to fatten the margins it earns when serving RIAs. Though money market rates aren't custody fees, they are one of the primary means custodians use to drive revenues from RIA custody.
“In this elevated rate environment, Fidelity is looking to grab a bigger slice of interest earnings -- at the expense of end clients," says Ben Cruikshank, president of Flourish, a cash management company for advisors.
“As a result, this change means more work for advisors who want to help their clients maximize their earnings. We've heard from several advisors who are looking into other options.”
The downside for Fidelity is that it slims a key point of differentiation between itself, Schwab and other custody rivals.
For sub-$500k accounts, Schwab is sweeping RIA client cash into its bank, pumping up corporate profits
Yet, the administrator of $11 trillion of assets (AUA ), and the No. 2 RIA custodian with about $1.5 trillion in assets, will still have an edge over chief rival Schwab, which has about $3.5 trillion of RIA assets.
Fidelity's FCash 2.25% rate is still more than four times the yield of Schwab's default for RIAs, which is about 45 basis points. See: For sub-$500k accounts, Schwab is sweeping RIA client cash into its bank, pumping up corporate profits
Of course, RIAs need only intervene with a few clicks at either rival to send the money right back to higher-yielding money market funds – but that's something that involves more labor across accounts than it might appear, they maintain.
Transactions seamless
Frank Bonnano, chief marketing officer for StoneCastle Cash Management in New York City, says overcoming the hassle of defaults is not “untenable” for busy RIAs. To move cash from one money instrument to another just isn't that big of a deal in 2023.
“I think ‘untenable’ in this case is tantamount to inertia,” he says.
“I get the part about the defaults. However, if it were untenable to move cash into a high-yielding cash account, then I wouldn't have a business model like I do with our FICA For Advisors.
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“The tech that we (and candidly others) use makes it pretty darn seamless to link the client’s bank or brokerage account,” he says.
“Plus, with integration with all major data aggregators/portfolio platforms and a 24/7 online RIA portal, it’s that much easier to view into the held-away cash while adding significant client value.”
“It isn’t meant to replace any ready cash for transactions/opportunistic trades in the brokerage account. Rather, it is a means to complement it by helping clients protect, earn, and save more is all.”
Bernie Clark chides TD Ameritrade RIAs during Schwab IMPACT for publicly airing merger transition 'negatives,' but RIAs say Schwab was quick to grease squeaky wheels
Dramatic growth
Michael Halloran, head of partnerships at MaxMyInterest, says rising rates have already lit a fire under advisors to take the time and energy to get the right cash products.
“While it's early to measure the impact of recent events, MaxMyInterest has seen dramatic growth in 2023 as advisors and clients discover the opportunities to earn tremendous yields on cash, with rates up to 5.36%, FDIC insured, and same-day liquidity,” he says.
“With the bigger firms telling their investors they intend to keep most of the spread of deposits for themselves, it creates an opportunity for advisors to realize what’s in the best interest of their clients.”
“Recent news about brokerage sweep rates is mostly a continuation of policies to favor the institution at the expense of the customer with a few adjustments being made on the margins to certain channels.”
News avalanche
Though something like a big sweep rate change can set off a minor furor among RIAs, Fidelity may be benefiting from Schwab's very busy couple of weeks in the news.
The Westlake, Texas company generated articles and attention at its national RIA conference, IMPACT 2023, as it tried to explain as best it could service disruptions experienced by new post-merger TD Ameritrade (TDA) RIAs. See: Bernie Clark chides TD Ameritrade RIAs during Schwab IMPACT for publicly airing merger transition 'negatives,' but RIAs say Schwab was quick to grease squeaky wheels
Then, on Monday, it attracted a world of attention from RIAs and consumers, alike, by laying off an estimated 2,000 employees, exacerbating concerns about service. See: With the swiftness of a lightning strike, Charles Schwab Corp. fires as many as 2,000 employees with no public announcement, affecting legacy Schwab, as well as TD Ameritrade staffers
On the heels of the layoffs, Barron's broke the sweep story first, with an Oct. 31 article, titled: Fidelity Takes a Page Out of Schwab’s Playbook on Low-Paying Sweep Accounts
The new FCash sweep provision does not apply to retirement accounts or any retail accounts, according to the article.
It also states that if the sweep account is empty, RIAs can directly access non-sweep accounts as cash to buy stocks, bonds, funds and other products.
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