With money market rates on the rise, LPL cuts them from cash sweeps

If LPL Financial clients want higher yield money market funds for their cash, they’ll need to opt out of the firm’s bank deposit sweep programs.

That’s because the No. 1 independent broker-dealer no longer offers money markets for sweep accounts — where clients’ cash yields between 15 and 75 basis points for them and an average of 220 bps for LPL. The firm cut money markets from cash sweep accounts, effective May 18.

Clients looking for a money market for a better yield on their cash should speak to their advisors about keeping it in their own investment accounts, according to a disclosure by LPL. The firm “has a financial interest” in consolidating the $30 billion asset program, the document states.

Sweep accounts do provide an easily accessible source of cash for fees or other trading expenses — and every large, publicly traded wealth management firm is raking in revenue from sweeps amid rising interest rates in recent years. Wall Street analysts track the figures closely.

Clients will “start making dramatic moves to harvest yield on cash” if money markets keep climbing above the 2% range to 300 or 400 bps, says Tim Welsh of Nexus Strategy. Otherwise, the convenience of sweeps often causes people to forget about the accounts, he says.

“The trend is down for costs and fees and revenues in investment management products,” Welsh says. “Cash is the easiest one to attack. They're just making a very logical revenue move.”

While LPL didn’t state the revenue impact of altering its cash sweeps, spokeswoman Lauren Hoyt-Williams said it stemmed from the firm’s constant evaluations of its products and advisor feedback. The firm’s digital platform makes it simple to tap the higher yields, she says.

“We’re always assessing our product offerings to put advisors in the best possible position to serve their clients and remain distinctly competitive in the marketplace,” Hoyt-Williams said in an emailed statement. LPL’s other changes to cash include “introducing traded money market mutual funds that have no transaction fees in advisory accounts, higher yields compared to current money market sweeps, and can be easily traded in ClientWorks,” she said.

Clients had $4.8 billion in money market funds out of $30.7 billion in cash sweep accounts at the end of the first quarter, according to LPL’s recent earnings report. Cash in the higher yield money markets had soared by 66% year-over-year prior to LPL’s switch in its sweep accounts.

At the end of the quarter, deposit cash accounts for IRAs held $4.3 billion and insured cash accounts for individuals, trusts and other entities had $21.7 billion. The insured cash accounts slipped by 4% year-over-year and the deposit cash accounts ticked up by 2%.

LPL made an average of 77 bps from money markets in the quarter, compared to 220 for deposit cash accounts and 250 for insured cash accounts. The firm generated $173.1 million in gross profit from cash sweeps — nearly a third of its total of $555.8 million and a 66% jump from the year-ago period.

Most clients will see much lower yields than the 75 bps received in an insured cash account by those with a household value of at least $10 million, though. The accounts have 10 tiers based on total assets, with a household value of $250,000 getting 27 bps, as of June 1.

Deposit cash accounts yield just 20 bps at all asset levels. Banks pay LPL fees based on a percentage of the average daily balance, up to a maximum 400 bps in an insured cash account. Advisors don’t get any portion of the bank fees in either type of cash sweep account.

LPL’s use of outside banks demonstrates one difference from other firms that use their own affiliated banks. The cash sweep accounts also fell slightly to $29.2 billion in April as clients paid taxes and equities rose. Money market assets in sweeps are still up 63% above April 2018.

On April 1, LPL stopped offering funds with yield rates of up to 230 bps for new accounts eligible for the cash sweeps. Existing clients’ assets remain in the money markets, but the firm removed the offerings for deposits in May and began using money market assets first to pay cash debits.

“If you have any questions about the bank cash sweep program or these changes,” the disclosure document states, “please contact your financial advisor.”