What forces an account to have a 'sweep' feature? Fido, Schwab. M/L, etc.

Comments

• msf

  November 12 edited November 12

  In 1987, Fidelity introduced the T-account, which combines all your fund accounts into a single statement. If you are invested in several funds or have a retirement account as well as a taxable account, this simplifies your record keeping and greatly reduces the amount of mail you receive from the Fidelity organization.

  https://www.tangotools.com/ui/fkbook.pdf
  
  Looking at my father's old statements, the "core" (transaction) holding in brokerage accounts was originally just "cash". What would now be called FCASH. Fidelity owed you that money on demand (like a bank) and paid some interest on that cash. As you said, FCASH is not a sweep account. It is, simply, cash.
  
  Later statements (early 2000s) show MMFs being used as core accounts. These are sweep accounts, with your cash being "swept" into a MMF and "swept" out when needed to pay for something. You probably had a choice back then of using a MMF (sweep) or keeping the money in lower paying FCASH account.
  
  Today when you open a Fidelity brokerage account you are "forced" to make a choice. Depending on the type of account you may use a MMF sweep (core) account or an FDIC-insured bank sweep account. But you also have the option of keeping your cash as cash (FCASH).
  
  People tend to think of "sweep" as "bank sweep", but it is any account that cash is "swept" into. Including the MMF core accounts.

  Broker-dealers may offer you several options for managing your cash. One option, a bank sweep program, typically involves the automatic transfer (or “sweep”) of cash in the brokerage account into a deposit account at a bank that may or may not be affiliated with the broker-dealer. Other options include leaving cash in the brokerage account, or sweeping cash to one or more money market mutual funds.

  https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-78
  
  Schwab also uses "sweep" to mean an account into which cash is swept, whether that be a bank sweep or a money market sweep:
  
  "Schwab One Interest [Schwab's equivalent of FCASH] and Bank Sweep are the two primary cash features. The Money Fund Sweep is an additional cash feature available to certain accounts."
  https://www.schwab.com/cash-investments
• catch22

  November 13

  Thank you @msf Ah yes, the T-account. Reminds me of the touch tone phone trades with the F.A.S.T. system and the introduction of the Select funds that could be traded with hourly pricing. The mid-80's was a busy and progressive period for Fidelity.
  As to my question is that I periodically have read here about folks having to move monies from a 'sweep' account into a 'cash' account to have monies for a purchase. Perhaps I misunderstand this process.
  With the 'cash' options for a new account at Fidelity the one choice of FDIC is the only cash position that uses the word 'sweep'. I'm used to the term 'core' for a place for cash settlements. I suspect the majority of 'core' cash funds at Fido are SPAXX and FDRXX. These two offer a yield that is about 2x higher than likely other choices.
  CORE funds for cash settlements (buy/sell) are a straight forward 'auto' functions at Fido IMHO; without rotating monies from a 'sweep' account that has been mentioned regarding Schwab. I recall the 'sweep' accounts have a much lower yield when parking money.
  Good evening.
• msf

  November 13 edited November 13

  Terminology is inconsistent and confusing. Disregard what Fidelity or Schwab or anyone else says is a sweep account. Some brokerages use it only to mean an FDIC-insured bank account. You've observed that at Fidelity. Others use it to include MMFs that can be used as a settlement ("core") account.
  
  For example, Vanguard gives you two choices for a settlement account: an FDIC-insured bank deposit account and the money market fund VMFXX. It calls both of these sweep accounts.

  Deposits [to the bank deposit account] are swept to Program Banks. [They] are not securities, are not cash balances held by VBS, and are not covered by SIPC. Assets swept to Vanguard Federal Money Market Fund are held by VBS, are not covered by FDIC insurance, and are eligible for SIPC coverage.

  https://investor.vanguard.com/investment-products/vanguard-cash-deposit
  
  Sweep accounts (whether bank accounts or MMFs) sweep both ways - they sweep uninvested cash out to the bank/MMF, and when needed they sweep cash back in. Fidelity's core MMFs like SPAXX meet that criterion.
  
  What Fidelity is doing is doing with non-core MMFs is giving you automatic overdraft protection. Like a bank that may pull cash from your savings account if you overdraw your checking account, Fidelity pulls cash from other MMFs if you overdraw your settlement account. But unlike that bank service, you don't have to sign up for it at Fidelity; you get it automatically.
  
  Those other MMFs (e.g. FZDXX) are not settlement (core) accounts. And they're not sweep accounts - Fidelity won't sweep spare cash into them. They only serve as overdraft protection.
  
  Other brokerages like Schwab similarly have MMFs that cannot be used as settlement accounts. These MMFs are not sweep accounts. Like Fidelity, Schwab won't sweep spare cash into them. But unlike Fidelity,  Schwab won't use them for overdraft protection. Rather, you need to manually sell the shares (e.g. SWVXX) in order to use the cash to purchase a security.