Opinion: Are you leaving money on the table in your investment account?
What is the rate of your hard earned money on your brokerage account? For most investors, the answer is close to 0% – and that’s a problem.
According to Crane Data, approximately $ 1 trillion is in uninvested cash in brokerage firms. Investors deserve an easy way to make more money with their cash, especially in the face of recent market volatility. Now is the time to find out if your financial services company is making a lot more on your money than you are.
When investors open a brokerage account, they often leave money, sometimes large sums, in the account. They can decide how to invest the money, put it aside or keep it for other investment purposes. For far too many people, this money earns next to nothing thanks to a low interest rate and the lack of choice of most brokerage firms. Fortunately, investors have another option to make their cash flow work much harder with a very different approach.
Has your money gone under the rug?
Regardless of why investors hold some of their money in a cash account, it is frustrating to know that many companies automatically âtransferâ funds to an affiliated bank and don’t offer any other default options. Even the most savvy investors can find themselves facing low returns on their cash flow. Their brokerage firm might not give them a choice for their core position. Or, if they give them a choice, they certainly don’t advertise it.
Most investors don’t realize how much their brokerage firm is taking advantage of their cash flow (and inertia) or that there is a better way. The result is that investors lose the opportunity to earn real money. The difference between a low yielding sweep rate and a higher yielding money market rate today could be close to 2%. Over the course of a lifetime of investing, the difference can really add up.
Investors deserve more
According to Federal Reserve data, Americans had $ 19.4 trillion in cash in various types of accounts at the end of last year. That’s a lot of money that could earn a lot more interest – for a lot of investors. While the variety of options for managing cash may be less than those for investing in stocks or bonds, investors have a choice.
Research conducted by Fidelity Investments this year showed that approximately 9 in 10 investors proceed with account opening without changing their swipe option. But about 8 in 10 chose the higher income option when given more information about it. Investors should consider whether their brokerage firm automatically invests cash in a high yield investment vehicle. Only a handful of companies, including Fidelity, take this approach because we believe it is the right thing for investors to do.
Education is the key, but in most cases the investor needs to make a conscious and proactive effort to invest their money in a higher yielding vehicle – rather than just sticking to the default sweep account. . (Note: some investors may choose to stick with a default sweep account because it is FDIC insured, and that’s understandable. But the higher yield accounts offered by some brokerage firms might as well. be FDIC insured. And even if they are not, the risk may be tolerable for many investors.)
Take an interest in your interest rate
Remember: someone earns a lot of interest on the trillions of uninvested money, and it probably isn’t you. It is up to the investor to find a better option. You can easily take the initiative with a few key questions:
â¢ Before opening a brokerage account, ask the company how it will deal with your unused cash.
â¢ Does the company automatically direct your money to a higher yield option, or does it direct the money to a low yield affiliate bank account or other sweep product?
â¢ Does the company give you a choice about how your money is invested or are you forced to choose an option that may benefit the company more than you?
â¢ What is the total picture? The cash transfer rate should be part of your assessment of the overall value the business can deliver, which can also include no minimums, low commissions, 24/7 customer service, and excellent investor training.
Make sure you choose a company that supports you and can help make your money work for you, no matter where the rates go. Investors deserve to know what their money is used for and how the brokerage is treating it. And they deserve to be sure that their business is working hard for their customers, not just to maximize their profits.
Kathleen Murphy is President of Fidelity Personal Investing. She is also responsible for Fidelity’s life insurance and annuity business; its employee savings activity for tax-exempt organizations; all corporate branding and advertising programs; Fidelity’s digital and data programs; the innovation of Fidelity’s business-to-business products and solutions; and Fidelity’s advisory services for retail and workplace managed accounts. Murphy sits on the Board of Governors of the Financial Industry Regulatory Authority (FINRA).