Your stock trades go for free, but your cash is in chains

Freedom is not free, nor is free trade.

You will no longer pay a few dollars in commissions to buy or sell a security with these companies. But Schwab and other brokerages are in the business of making money, and one way they often do that is by milking customers' cash. When you shop for free, you still pay – at another toll booth.

In fact, the term "mediation" becomes an error number. Companies like Schwab are more like banks than brokers. Commissions accounted for less than 7% of Schwab's total net revenues in 2018; they were 14% in 2014.

Why take it to zero? Eradicating commissions is the logical culmination of what Schwab has been doing ever since the former Charles Schwab newsletter publisher founded the company in 1[ads1]973: reducing investment costs. Schwab's listed funds charge as little as 0.03% in annual expenses, and the company offers financial planning for a $ 30 monthly subscription (after an initial $ 330 planning fee).

Schwab can offer such cheap alternatives in part because of how it handles investors' cash. The company automatically sweeps idle cash not into mutual funds or other assets that can provide about 2% at today's rate, but to its own bank, which pays peanuts.


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As is typical in the brokerage industry, Schwab puts customers' uninvested cash – say dividends or interest payments – on what is called a sweep account. It's your money, but how much they earn isn't always up to you.

You may be able to earn better prices. In the first half of 2019, Schwab customers moved $ 58 billion to money market funds and other higher yield choices. But most people don't bother. Even worse, many do not have a choice because they have accounts required to hold cash for low returns in Schwab's own bank. This has been a bonanza for the company.

Schwab pushed $ 11.8 billion out of excess return money market funds into its own bank during the first half of 2019, according to the company. As of June 30, Schwab's bank deposits totaled $ 208 billion. This week, clients earned between 0.12% and 0.55% on these balances.

Schwab is not alone. Throughout the brokerage industry, most swipe accounts pay unclear interest – sometimes as little as 0.05% on a $ 100,000 balance.

This year, with the Federal Reserve lowering interest rates, sweeper returns have fallen by almost a third, to 0.2%, since peaking in March, according to Crane Data, a Westboro, Mass., Company that tracks cash accounts. The average return in the mutual fund shrank less, to 1.8%.

When interest rates fall, investors care less about what money gives. "Many of the brokers expect this sensitivity to prices now," says Peter Crane, president and publisher of Crane Data.

When customers invest in Schwab Intelligent Portfolios, its roboadvisory service that offers pre-selected baskets with ETFs is between 6% and 30% of the money going into cash. Schwab does not use money market funds or short-term government debt, which can earn almost 2% at recent rates. Instead, it shunts the cash to Charles Schwab Bank, which today pays 0.55% on the money – and then turns and lends them to about 2%.

With $ 41 billion in assets, these portfolios have around $ 4 billion in cash. Provided the Schwab network spends 1.5 per cent by lending money through its bank, the company earns about $ 60 million a year. Customers, meanwhile, earn under $ 25 million.

Schwab reveals all this. The rate it pays for customers' cash "may be higher or lower than … on comparable deposit accounts in other banks," warns a disclosure by Schwab Intelligent Portfolios. "Schwab does not intend to negotiate prices that seek to compete with" other cash options, the disclosure adds.

The document further states that if you need to withdraw money from your Schwab Intelligent Portfolios account, the company may sell some of your ETFs – potentially triggering a taxable capital gain – to restore the cash balance to the required level.

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Fewer than 1% of customers have such accounts for a cash distribution of 30%, says a Schwab spokeswoman, and the average cash portfolio in the program is about 10%. The sale of some ETFs to return the cash distribution to the required level is no different from what happens after withdrawals from any other account that have predetermined goals for ownership interests, she says.

Still according to David Goldstone of Backend Benchmarking, a research firm in Martinsville, NJ, that tracks automated investment services online, no other roboadvisor claims that clients own as much as 10% in low returns.

How does Schwab unite in forcing its customers to invest in their own bank at below market prices with their duty to put customers' interests ahead?

"We take our fiduciary duty very seriously," the company said in a statement. "Our clients who invest through Schwab Intelligent Portfolios understand the cash that will be in their portfolio before deciding to invest."

When I asked the Securities and Exchange Commission if it had any comment on how advisors treat investors' cash, Chairman Jay Clayton responded, "This is exactly what kind of questions investors should ask."

Write to Jason Zweig at

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