Every brokerage account has what is called a “sweep” feature or sweep account. It can be both a benefit or a detriment depending on how you use it and what options you selected when you set it up.
When you setup a new brokerage account, you usually have to assign what you do with your cash. This is called the sweep. As you deposit cash into an account, it will, by default, go into the sweep. Also, if you elect to have dividends paid in cash, they will sweep into the account.
The great thing about the sweep account is that when you want to buy more securities, the cash is automatically swept back into your brokerage to buy the securities. If you trade on margin, the cash in your sweep account will also be counted towards your margin requirement.
Benefits of a Sweep Account
There are several benefits of setting up a sweep account correctly. First, most sweep accounts are FDIC insured, which provides your cash with a level of protection. Second, you can earn interest on the money in the sweep. If the money just sat in your brokerage, chances are you would earn nothing. To earn some interest with the cash outside of a sweep account, you would have to invest in a money market fund.
Don't want to use the sweep account? Consider moving your funds into a high yield savings account instead:
Dangers of a Sweep Account
It is important to note that sweep accounts are one of the most profitable products that investment firms offer. You may wonder why? Because most individuals don't set them up correctly, and as a result, the firm pays you nothing on you cash.
When setting up your sweep account, look at the options available to you. Money market, savings accounts, etc. Don't just settle for a yield of 0.01%.
Taking Sweep Accounts To The Next Level
Some institutions are very flexible with what you use as your sweep account. There are some that even let you link your sweep account to your regular checking account. This can be very convenient if you draw on the cash in your brokerage regularly. On the same front, if you have a high-yield savings account, this could be a great sweep account.
It is important to note that the sweep feature is only available on standard brokerage accounts. If you have a retirement account, you need to look at how your cash is being handled in the account.
Readers, are you maximizing your sweep account, or is your cash just sitting there?