Your Broker Is Ripping You Off

Includes: IBKR
by: SA Eli Hoffmann

Brokers sweep your cash out of your account into money market funds, often keeping the lion's share of the returns.

They may be making as much as 10x on your cash as they're giving you.

What can investors with cash in their brokerage account do to earn more interest?

A recent piece by WSJ's Jason Zweig caught my eye. The lede:

When some investment firms say they will treat your money as if it were their own, they mean it - all too well.

In a fairly detailed article, he documents how investment firms are making gobs of money off idle cash sitting in investors' accounts. Some of the facts on the ground:

  • Short-term interest rates have risen from 1.1% to 1.9% over the past year; brokerage firms have barely budged how much they pay on their customers’ cash.
  • Many firms sweep your cash into banks their parent company owns. Check out the fine print in one firm's disclosure: "In setting interest rates, the affiliated banks may seek to pay as low a rate as possible."
  • Another firm discloses that the adviser assigned to your account may get paid an incentive fee for steering your cash into a sweep at a sister bank rather than encouraging you to shop elsewhere for better rates.
  • Another firm discloses that it pays 0.1% in service fees to deposit your cash in an interest-bearing bank account where it earns 1.9%. Your take on deposits of less than $250K? 0.13-0.14%.

The business is lucrative. Larger firms disclose 10s of billions of cash dollars sitting in client accounts that are being swept into banks.

Some firms say that 25% of their total gross profit comes from cash sweeps.

My point here is (mostly) not to beat up on the brokerages. They have businesses to run, and maybe they're using the interest they earn on your cash to make your life better in other ways, like commission-free ETF trades. Or to increase employee morale by paying better bonuses.

My point is to tap into the Seeking Alpha hive mind. I'm sure many of you have grappled with the question: What can we do to earn more on our cash that is not deployed into investments?

I'll throw my hat in the ring with one idea: I use Interactive Brokers (IBKR). I have not done an exhaustive survey, but they pay benchmark - 0.5% on cash deposits over $10K (currently 1.41%), which is a lot more than it seems most brokerages are paying based on the WSJ article.

Looking forward to the discussion.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.