In a year when every nickel and dime counts, wise investors are investigating sweep accounts, the money market funds where brokers and banks put money left over from securities trades or sales. Think it doesn’t matter? A group of investors recently sued their brokers for fraud because the brokers parked their money in poorly performing funds — funds where the brokers earned a commission.
The investors lost (the judge told them they should have read the prospectus), but the lesson is clear: Know where your money is going. Online brokers, for instance, often offset low commissions by sweeping idle cash into their own coffers, paying below-market rates on that cash, and pocketing the spread. “The difference could be more than one percent, no small thing,” says certified financial planner Marv Kaye, principal of Kaye Capital Management in Los Angeles.
If you’re a heavy trader, you may be better off with low fees for lots of trades, even if the idle cash has a low return. But if you’re not, and your broker or money manager offers a money market sweep fund, make sure you have choices — and manage them. Compare fees and average returns to get the best deal. To get the highest rate of return, choose the lowest level of account services you can live with.