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What Is a Sweep Account?

Sweep programs take extra cash in your bank account and put it to work in higher-yield savings or investment accounts. Here’s how they work.

When it comes to investing, it’s important to make sure your money is working for you as much as possible. However, it’s common for cash to sit in people’s accounts earning relatively little interest. For this reason, many financial institutions offer a sweep program, which sends excess funds to higher-yield or investment accounts to earn more.

In this article, we’ll provide an overview of what a sweep account is and how it works. This includes a breakdown of the various types, pros and cons, and how to open an account.

Key Takeaways

  • Sweep accounts automatically move cash over a set threshold into a higher-yield account at the end of each business day.
  • When you open a sweep account, you’re typically able to determine the threshold.
  • These accounts ensure your money earns more than sitting in a low-interest account.
  • Other types of accounts, such as those for businesses or loan repaying, can apply to unique clients’ needs.
  • Some sweep accounts incur fees and, if funds end up in a brokerage account, they won’t be FDIC-insured.

How Sweep Accounts Work

A sweep program, typically offered by brokerage firms and banks, involves moving excess funds from a cash account into a higher-yield savings or investment account. This ensures your cash doesn’t sit idle but can earn more substantial interest or returns, such as from a money market fund. The process is usually automatic, occurring at the end of each business day, helping clients avoid the need for active management.

For example, imagine you have $12,000 in a bank checking account that earns 0.07% APY. If your sweep threshold is set at $8,000, any balance over that mark ($4,000 in this case), would automatically be swept into a higher-yield savings account or brokerage account in a given day.

If the $4,000 from the example above is transferred to a HYSA offering 1.50% APY (many banks offer much more), you’d earn substantially more interest than in your checking account. In a year, the $4,000 swept into the higher-yield account would generate approximately $60 in interest at 1.50% APY (compared to only $2.80 earned in your checking account at 0.07% APY).

Be aware that, while your funds go into a higher-yield vehicle, they won’t typically be invested in any high-risk securities automatically. Often, they’ll end up contributing to a money market fund or in a high-yield savings account (HYSA). If you wish to invest in moderate to high-risk investments, it’ll be up to you or your investment manager and depend on your risk tolerance.

Typically, your cash account will have a threshold that dictates when and how much money is swept up each day. It’s common for financial institutions to allow you to configure this ahead of time.

Sweep accounts, while convenient, aren’t always a free feature to use. In some cases, firms will charge you both flat and broker fees to utilize it. It’s important to verify this information with your bank or brokerage firm before using the account.

Types of Sweep Accounts

While sweep accounts generally function similarly, financial institutions may offer several types. These differ based on your needs, such as whether you’re an individual client or a business. Below is a breakdown of each type:

  • Individual. These are accounts for individual clients, where excess cash over a set threshold is swept into a higher-yield option.
  • Business. This type, tailored to business accounts, sweeps excess funds from a checking account into higher-yield short-term investments.
  • Loan payback. In this case, excess funds go toward paying back debt rather than into a high-yield account.
  • External. It’s common for banks and brokerage firms to allow you to sweep funds into high-yield accounts at other institutions.

Pros and Cons of Sweep Accounts

Sweep accounts can be a beneficial tool to help your money work for you as much as possible. They can invest cash in higher-yield options on your behalf, taking effort and guesswork out of the equation. Additionally, these programs typically send money to highly liquid options, making it easy for you to get cash when you need it.

However, there are some downsides to consider if you’re opening a sweep account. First, banks or brokerage firms may charge fees whenever they move or invest your excess money. Additionally, if this cash is in a brokerage account, it is no longer FDIC-insured. Finally, if you value having absolute control over your finances, setting up recurring or automatic transactions like this may be unnerving.

Pros

  • It makes it easier to invest more and ensure cash isn’t sitting idle.
  • Increases your returns by moving funds to a higher-yield investment option.
  • Funds end up in liquid, short-term investments, making it easy to tap into them.

Cons

  • Some sweep accounts incur broker or transaction fees.
  • Funds swept into brokerage accounts won’t be FDIC-insured.
  • It may cause you to feel like you’re not in control of your account.

How to Open a Sweep Account

When you open a sweep account, it’s typically through a bank, brokerage, or investment management firm. If you’re a new or existing client, check if the financial institution offers a sweep program and which accounts it applies to. It’s also important to check how the firm operates its program, including whether you can set cash thresholds and where your funds get swept into.

Many firms offer sweep programs, either as part of their banking, brokerage, or advisory businesses. Below are five prominent firms that make them available for clients:

Before you open a sweep account, consider the pros and cons and what it might add to your financial picture. It’s a good idea to speak with a financial advisor before you decide to begin, especially if you haven’t already been investing in a brokerage or retirement account. They’ll also be able to help you understand how to allocate excess cash into other investment options beyond an HYSA or money market fund, such as equities or bonds.

Frequently Asked Questions

Are sweep accounts FDIC insured?

Sweep programs comprise two accounts—a checking or savings and an investment account that provides a higher yield. The former will typically be FDIC-insured; however, the latter won’t be unless it’s a HYSA. Brokerage accounts are primarily SIPC-insured, which protects you if the financial institution holding your funds goes bankrupt.

Can I withdraw money out of a sweep account?

You can withdraw money from your bank account or by liquidating investments your excess cash goes toward. For instance, if you own shares of a money market fund, you can typically sell them quickly for cash. One major benefit of a sweep program is that it generally only puts your additional cash toward short-term instruments.

Is it possible to lose money in a sweep account?

Typically, you won’t lose money from a sweep account or program. However, it’s important to be mindful of where your funds end up, such as in short-term investments. If, in a rare instance, the value of those assets goes down, you can take a loss.

What are the downsides of a sweep account?

Sweep accounts, while often beneficial, may charge fees depending on the firm you use. Additionally, if your money ends up in a brokerage account, it won’t be FDIC-insured. It’s also important to be sure you’re comfortable with money automatically transferring from your account daily, much like a paperless billing system.