USAA sold all of its investment accounts to Charles Schwab and the transfer happens this month. I just want to point out how Schwab and other investment companies are making money in the age of low fees and zero trade commissions – your cash accounts.
Gone are the days when mutual funds extracted 2% fees each year for managing your funds. Now it is your cash that they extract wealth from. See while they pay you a measly 0.06% to 0.35% for your cash account they are investing it and keeping the earnings for themselves.
With USAA you could set up a sweep account to “sweep” your cash automatically into a nice juicy money market account so the money was not just sitting idle. Or to a FDIC-insured bank account to provide safety but not much in interest. I love the automatic sweep feature.
Schwab recently moved all their current customers to low interest cash accounts and will now bring USAA investors in to the same situation. Schwab is not alone, most brokerages are doing the same thing expecting investors to be too lazy to notice or care.
So what can you do whether you are at Schwab or some other brokerage company?
You can BUY money market funds with your cash while not in equity funds to obtain interest on your cash. But more important today I recommend you set up your account so you can manually sweep your cash into a FDIC insured bank account for protection – especially in today’s environment.
During bear markets in the stock market, you might want to sit on the sidelines in cash for a couple of years. Earning interest matters to high balances. And in real financial crisis (like today) you need to have access to FDIC insurance for your deposits. Yes, it COULD get this bad.
Do you think I am fear-mongering? How many retail investors outside of TSP Smart members know what happened in March? Did your advisor mention it and explain what happened and can still happen?
Ho-hum, I try.
In my opinion the Federal Gov’t is less likely to bailout the underfunded SIPC insurance in speculative brokerage accounts than the FDIC insured bank deposit accounts.
The good news, is that Schwab has the ability to link an FDIC-insured bank account to your brokerage account and so do other brokerages. You need to look into this to make sure you are set up for when you need it.
USAA’s timing was good. Just as Schwab and other brokerages were seeing $ signs on rising interest rates that they would earn profits via your cash accounts, interest rates reversed and their new profit channel died.
And so, in the end you are not losing much at current rates to your brokerage company’s cash scheme. You are losing interest earnings to debtors thanks to central bank manipulation of rates via asset purchases – but that is another story.
One last thought for today’s investing environment. I would rather have FDIC insurance at 0% interest rates, than no FDIC insurance in a money market fund earning 0.35% or less. Something to think about because in the long-run, risk matters.
PS. Title aside, USAA and Charles Schwab are good companies with great customer service. Just don’t be lazy with your cash accounts. Know what your risks are and how your broker earns profits… off of you.
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