Fidelity’s Latest Zero-Sum Corporate Weapon: Let Clients Earn Interest on Cash

The company is automatically putting customers’ cash in a money market fund and calling out TD Ameritrade, Charles Schwab and E*TRADE for not doing the same.

(JB Reed/ Bloomberg News)

(JB Reed/ Bloomberg News)

A confluence of market volatility, downward pressure on interest rates and intrigue with safe haven assets likely prompted Fidelity Investments to launch its latest corporate weapon. The company said Wednesday that it will invest clients’ cash in new brokerage and retirement accounts into a high-yield money market fund.

“Taking advantage of current market conditions, I think this is a great strategy to attract and retain clients,” says Greg O’Gara, a senior research analyst for Aite Group’s Wealth Management practice.

The cash will automatically be invested in the Fidelity Government Money Market Fund unless clients choose otherwise. The fund’s 7-day yield was 1.91% as of Aug. 5, well above the rate competitors are paying their investors for access to their cash.

Charles Schwab’s clients are earning 0.18%, E*TRADE’s are earning 0.07% and TD Ameritrade’s 0.04% in their default low-yielding products, typically at an affiliated bank. The so-called sweep accounts mean piddling returns for investors, but more cash for institutions to earn interest income on.

“This is a deliberate tactic aimed at the Achilles heels of Schwab and TD because they have been supporting their businesses with the interest income,” said Timothy Welsh, the president, CEO and founder of Nexus Strategy, a consulting firm to wealth managers. Welsh was previously the Director of Business Consulting Services for Schwab Advisor Services where he led the development and marketing of practice management resources for independent advisors.

Fidelity has been automatically sending client cash in retail brokerage accounts to the mutual fund since the fall of 2015. Cash in retirement accounts began automatically finding its way there this spring. But the firm became outspoken about it just this week.

Schwab’s net interest revenue rose 14% year-over-year in the second quarter to $1.6 billion and was “largely driven by higher interest-earning assets relating to the transfer of sweep money market fund balances to bank and broker-dealer sweep,” said CFO Peter Crawford.

During what Crawford said was its “strongest second quarter ever,” Schwab reported total revenue at $2.68 billion, up 8% from a year ago.

TD Ameritrade reported net interest revenue of $383 million in the third quarter, and net revenue of $1.49 billion.

“We have had a strong year thus far, successfully navigating through changes in the interest rate environment and client cash behaviors, demonstrating the diversity of our business model. Planning is well underway, as we are focused on the long-term,” Steve Boyle, executive vice president and chief financial officer of TD Ameritrade, said in a statement about the company’s third quarter that ended in July.

Welsh said changes like automatically putting clients’ cash in a money market fund cannot be made on a whim. That decision was months in the making and Fidelity, a private company, is playing the long game.

“They know the rest of the brokerage world is in a tough bind because they can’t match that,” Welsh said.

Advisors that use Fidelity Custody and Clearing Solutions have expressed to the firm they want the ability to choose the cash option that is right for their clients and the firm already provided those, including money market funds and an FDIC-insured Bank Deposit Sweep Program, according to Rachel Shaffer, a spokeswoman for Fidelity.

It is unclear what impact, if any, the changes will have on competitors. Although, O’Gara said customers routinely use competitors pricing to leverage better rates for themselves.

“They will absolutely make concessions on those rates for clients, if they can.”

TD Ameritrade doesn’t appear to be budging on its current policy. A spokesperson said the company’s cash sweep is designed to meet the needs of account transactions and that it is conscious that money market funds are not risk-free.

“Our cash management approach is to offer clients choice with a variety of non-proprietary cash management products to meet client yield requirements, including SIPC-protected brokerage cash, fixed income, position-traded money funds from leading firms like Federated, JP Morgan and State Street, and sweep accounts,” a spokesperson for TD Ameritrade said in a statement.

Charles Schwab and E*TRADE could not be reached to comment.

“This development shows the increasing competition for consumer investment accounts. As the shift to passive investing reduces the differentiation and ability to compete with robo advisors,” said Gil Luria, the Head of Institutional Research at D.A Davidson. “Money managers need to find new ways to differentiate. It is very possible that others will follow Fidelity’s lead, but taking action first may still give Fidelity some advantage.”