While your brokerage account may be performing well with stocks and bonds yielding solid returns in 2023, the same cannot be said for the cash in your account. The issue lies with some savings accounts at brokerages that offer a lower annual percentage yield (APY) compared to what you could earn at the top online banks. In reality, many brokerages utilize your cash as a low-cost source of funds, profiting from it while only providing you with a fraction of the potential interest you could earn.
“Many people tend to overlook the earning potential of the cash sitting in their brokerage accounts,” notes Greg McBride, CFA, Chief Financial Analyst at Bankrate. “While waiting for another attractive investment opportunity, it may remain idle. However, it’s important to ensure that it earns a competitive return during this time.”
To maximize your earnings, here are three key considerations for managing cash in your brokerage account.
1. Check the interest you’re earning – or not earning
Before anything else, take a moment to assess the interest your cash is currently earning. Take a look at your brokerage account statement, log in to your account, or give your brokerage a call to determine the type of account your cash is in and its performance. Additionally, ensure that your dividends are being reinvested; otherwise, they may accumulate in a low-yielding account.
“They may believe they’re invested in a money market fund, as that’s traditionally where cash in a brokerage account is held. However, some brokerages have covertly switched the default cash holding to an FDIC-insured bank account,” McBride explains. “At first glance, this may seem like a great option. Yet, the truth is, the yield they offer is only a fraction of what you could earn in a money market fund.”
If your cash is in a savings account, it’s crucial to verify the actual APY you’re earning.
In the case of a mutual fund, it will explicitly state the name of the fund and its ticker symbol, as mentioned by McBride. If the statement merely indicates “cash” or something similar, it suggests that the funds may be held in a low-yielding bank account. Additionally, it is crucial to verify whether you are receiving monthly interest payments, as the absence of such payments likely means that you are not earning any interest.
2. Know whether the account is insured
Do not mistake a money market mutual fund for an FDIC-insured money market account. Although many people consider them to be the same, there are subtle differences as pointed out by McBride.
Money market mutual funds, or money market funds, likely qualify as securities for Securities Investor Protection Corp. (SIPC) protection. They receive protection when held at an SIPC-member broker-dealer. However, it is important to note that these securities can lose value, and the SIPC does not provide protection against market losses, as stated on SIPC.org.
“Although bank accounts are federally insured and provide solid protection, money market funds are equally stable,” explains McBride. “Prominent brokerage and mutual fund companies go to great lengths to maintain the one-dollar net asset value of their mutual funds. The potential damage to their reputation and the risk of investors withdrawing their capital is too significant to risk breaking the buck.”
Money market funds have the potential to generate competitive yields that align with market fluctuations, as highlighted by McBride. If you have funds that you need to have readily available for trading at any moment, this could be an ideal option for that specific purpose.
For instance, at Fidelity, brokerage, IRA, and HSA investments default to SPAXX, Fidelity’s Government Money Market Fund. As of July 28, SPAXX was offering an average yield of 4.96 percent over a seven-day period, as reported by Fidelity.
If you have some money that you’re not planning to invest in, consider FDIC-insured savings accounts that offer an APY of over 5 percent. Such yields are unlikely to be found in a brokerage account savings account.
According to McBride, the FDIC-insured bank accounts offered by most brokerages tend to offer minimal returns because the brokerage benefits from your cash, not you.
3. Find a better place for your emergency savings
To ensure that your emergency fund maintains its purchasing power, it is crucial to account for inflation. Without doing so, the funds might lose their value when you need them the most. This is precisely why experts like McBride recommend keeping your emergency fund in a high-yielding online savings account. According to McBride, this strategy offers a better yield compared to money funds. By following this advice, you can effectively preserve the value of your emergency fund and make the most of your financial resources.
A brokerage account offers an ideal platform to invest your cash when you spot a buying opportunity in the market. Some robo advisors provide a competitive yield on funds that you wish to easily invest in the future.
However, relying on pass-through FDIC insurance, where your money is not directly held by an FDIC-insured bank, can carry risks. There is a possibility that the third party may fail to deposit your funds, or the FDIC’s pass-through insurance requirements may not be met, as stated by the FDIC.