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Cash account yields' big gap

The Baltimore Sun

Not earning a competitive yield on your cash? A government agency is taking steps to show what you're missing.

Last month, the Securities and Exchange Commission introduced a proposal that would require brokerage firms to better explain cash account options and the yields paid on them.

Investors often accumulate cash in a brokerage account after, say, selling a stock or receiving a dividend payment. Periodically, the broker "sweeps" that cash into a savings vehicle (money moved this way is often referred to as sweep cash).

In recent years, more investment houses have started dumping sweep cash into bank deposit accounts. Before, most cash was placed in money market funds.

Today, the average annual percentage yield for money funds is 4.99 percent, while cash accounts at brokerages pay 2.64 percent, according to Crane Data LLC, which tracks money funds.

Cash accounts pay comparatively lower yields to investors, and banks often come out ahead because deposits can be put to use, say, for underwriting loans at a higher interest rate. As a result, the SEC argues investors should be given better notice of where their cash is going.

But you don't have to wait for a government regulation to maximize your cash.

"Brokerages do everything possible to make it easy to take your money out," said Peter Crane, co-founder of Crane Data. "I mean, they send you a book of checks."

The only hindrance is that you have to do the "sweeping" yourself.

Not everyone has a brokerage account. But everyone holds cash in some form, and the SEC's proposal highlights that if you don't pay attention, you could forgo the opportunity to earn richer yields.

Read statements

"In reality, it's the investor's money and they definitely should read the statements to get the most benefit out of their funds," said Zoya Lieberman, a product manager at Informa Research Services Inc., a market research firm for the financial industry.

Here are some tips:

Sweep cash into high-yielding accounts

Brokerages tend to pay the highest yields on sweep cash for investors with significant assets.

At Charles Schwab & Co., for example, you need $500,000 or more in combined assets at the firm for your cash to be swept automatically into one of Schwab's money market funds, which yield around 5 percent. Otherwise, your cash earns roughly 1 percent to 2.5 percent in a Schwab Bank account, depending on your balance.

As a Schwab representative points out, you can opt to move your cash into other accounts, such as a three-month certificate of deposit now earning 5.01 percent. And, theoretically, your sweep cash is in a state of transit, much like the cash in your checking account. Earning a high yield doesn't matter as much if the money is going to be reinvested elsewhere quickly.

If, however, your money tends to sit in a cash account, then move it to a money market fund or other higher-yielding option.

Plus, some brokers still give investors a choice of having cash swept into either a bank account or money market fund. E*Trade Financial customers can elect a bank deposit with rates ranging from 0.10 percent to 4 percent (the default option), or a money market fund yielding from 4.14 percent to 4.56 percent.

Research online

If you're unsure, ask.

Research rates online. For the rest of your cash, there are many online savings accounts, bank money market accounts, CDs and money market funds all paying around 5 percent.

To find these offers -- there's a good chance they might not be available at your local branch -- head to sites such as www.bankrate.com, www.imoneynet.com, and www.cranedata.us, as well as online forums such as www.fatwallet.com/c/52/.

Some Web banks -- such as ING Direct and EverBank -- recently launched checking accounts with yields as high as 4 percent and no minimum balance.

Don't think you have a pile of cash somewhere? Remember your tax refund: As of April 6, the average refund was $2,366.


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