Cash Is King: An Answer To RiaBiz’s Most Recent Article

Executive Summary

Schwab told its clients on August 8 that sweep cash is coming out of FDIC insured partner banks and moving into the brokerage itself, covered by SIPC instead, with the conversion running from September 8 through December 7. The trade press read it the way you would expect. RiaBiz reported the change with clear drawbacks for investors according to the analysts they talked to, and Ben Cruikshank at Flourish told them SIPC is unquestionably a lower level of protection than FDIC, that FDIC is the gold standard. He’s right about that. Every advisor reaction we’ve seen since has been about the insurance, because the insurance is what the notice puts in front of you.

The insurance is the smallest part of this. A claim against SIPC on a firm holding $13 trillion in client assets is a scenario where the coverage question has already stopped being the interesting one. The number worth reading twice is in the same notice and almost nobody pulled it out. The new Schwab One Interest feature pays 0.01% APY, which is what Bank Sweep was already paying. Same yield, less coverage, and none of the savings going to the client. Meanwhile the Investment Company Institute counts $7.91 trillion sitting in money market funds as of the week ended August 5, a record. Clients with real money have been solving this themselves for three years. The conversation this notice should start has almost nothing to do with September 8.

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Cash, cash, cash.

Dale was an advisor we talked with this spring. Sixty-one, a hundred and ten or so households, custodied at Schwab since he went independent. He called about something else entirely, a staffing question, and cash came up the way it usually does, sideways. One of his better clients had sold a rental property in January and the proceeds had been sitting in the brokerage account ever since. Something north of four hundred thousand dollars.

Dale sort of knew it was there. It showed up on the statement every month. He hadn’t done anything about it because nothing about it looked urgent, the client hadn’t asked, and there was no line in his process that said look at the cash. He’d built a review meeting around allocation, planning, and taxes. Cash was the thing that sat underneath all three and belonged to none of them.

That’s the whole problem, and it was the problem before Schwab sent anything.

How Cash Became The Best Line On A Custodian’s Income Statement

Before cash sweeps, every brokerage account had a money market fund holding a client’s cash, ready to deploy at a moment’s notice. Emphasis on moment, because it wasn’t moments, it was days. Clients sold out of the money market fund, then wired the proceeds to their local bank and waited for it to land. Or, depending on the account’s standing with the broker, they could trade those funds before settlement. Then the commission wars happened.

Not that long ago equity and ETF trades cost real money. Trades were $20, then $10, then $7.95. Then seemingly out of nowhere Schwab went to zero commissions and everyone followed inside of a week. Millions of trades a year stopped generating a dollar. How does that firm survive. Part of the answer was payment for order flow, which is worth its own post. The rest of the answer was cash.

Just like a bank, brokerages sit on mountains of it. And just like a bank they can earn a spread on it, lending it out or parking it and keeping the difference between what that earns and what they pay the client. Sounds fine. Clients stopped paying commissions and the firm found another revenue line.

The catch is that a business built on taking risk for more yield than you’d find at a bank is now encouraging clients to hold cash at those very institutions, and that’s a confusing thing to explain in a review meeting. Custodians cleaned it up with the positives. You’ll have FDIC insurance now. There’s a debit card with no transaction fees and no foreign transaction fees. Those aren’t bad perks and they work for most clients, but for advisors it made the cash conversation harder, because the money market funds tended to pay more and everybody could see it.

This isn’t a theory about how custodians think. The SEC wrote it down. In 2022 the agency charged three Schwab investment adviser subsidiaries over its robo product, Schwab Intelligent Portfolios, which from March 2015 through November 2018 held between 6% and 29.4% of client assets in cash while the disclosures called that allocation a disciplined portfolio construction methodology seeking optimal returns. Schwab’s own data showed the cash made clients less money under most market conditions. Schwab swept it to its affiliate bank, loaned it out, and kept the spread. The subsidiaries paid $52 million in disgorgement and a $135 million civil penalty, $187 million in total. The enforcement director’s line at the time was that the cash allocation was decided by how much money the company wanted to make.

That order is four years old and it’s still the most useful thing an advisor can read on this subject, because it establishes the incentive in writing, from the regulator, about this specific custodian.

What Schwab Is Actually Changing Between September And December

Here’s the mechanical version, and it’s worth being precise because your clients will be imprecise about it.

Today, uninvested cash in a Schwab One brokerage account sweeps out to a set of FDIC insured partner banks. FDIC coverage runs $250,000 per depositor, per insured bank, per ownership category, so spreading a balance across multiple banks multiplies the coverage. Will Trout at Datos Insights gave RiaBiz the clean example. A client with $500,000 in uninvested cash might have $250,000 sitting at Bank A and $250,000 at Bank B, each covered in full, so the whole balance is protected.

After the conversion that cash stays in the brokerage as a direct obligation of Schwab, covered by SIPC. SIPC protects up to $500,000 per customer per capacity, and inside that there is a $250,000 limit specifically for cash claims. No multi bank spread. That same $500,000 tops out at $250,000 of protection on the cash side, full stop. Schwab’s own notice says it plainly, that unlike the FDIC, SIPC does not provide blanket coverage, and that Schwab One Interest is not a bank account, is not a money market fund, and is not FDIC insured.

Two more things from the notice that matter operationally. Clients who want to stay on Bank Sweep can, and it takes a phone call to Schwab to do it. And Trout’s read on why any of this is happening is that holding the cash directly as a broker dealer obligation rather than depositing it at partner banks lowers Schwab’s cost of capital and borrowing costs. Schwab offered no explanation and didn’t respond to RiaBiz’s request for comment.

It’s worth being concrete about how many firms this lands on. Of the RIA firms in the SEC’s adviser data we work from that name a custodian on their Form ADV, 223 of 426 report Schwab, about 52%. Roughly half the independent firms in the state get the same notice in the same window, and their clients get it directly, usually before the advisor has decided what to say about it.

As of right now this looks specific to one custodian. Trout says Fidelity and Pershing haven’t announced anything similar. We’d expect that to change eventually, because the economics are too good for a public company to leave alone once a competitor proves the notice can go out on a Friday without much happening. If you want the wider view of how the custodians stack up for a firm your size, we went through it in our comparison of Schwab, Fidelity, and the upstarts.

The Insurance Question Is The Smallest Part Of This

Now the part where we part company with most of the commentary.

For the large majority of your clients this change is nothing. If a household’s uninvested cash sits under $250,000, the coverage they have on September 7 and the coverage they have on December 8 are functionally the same coverage, and the difference only ever shows up in a Schwab insolvency. Telling those clients they’ve lost protection manufactures a worry they didn’t have and can’t act on.

Above $250,000 in idle cash it’s a real change and you should treat it as one, because that’s where the multi bank spread was doing actual work. That’s a smaller group than advisors assume. Go count it. Most books have somewhere between two and ten households in that category and every one of them is a phone call you can make in an afternoon.

There’s a fair objection here, which is that the FDIC backing is explicitly government and SIPC is a private nonprofit membership corporation created by Congress in 1970, so treating them as close enough is exactly the reasoning that ages badly. That’s a legitimate read and we don’t dismiss it. The honest answer is that the coverage difference is real and the probability it ever gets tested is not the thing driving client outcomes this year. Something else in the same notice is.

The Yield Gap Is The Part That Has Been Costing Clients All Along

0.01% APY.

That’s what Bank Sweep pays and it’s what Schwab One Interest will pay. Cruikshank’s point to RiaBiz was that the real story is clients being moved from one option paying a penny per hundred dollars to another option paying a penny per hundred dollars, and that while a brokerage account is a fine home for operational cash, advisors should be looking elsewhere for reserve and held away balances that ought to be earning a competitive rate.

Put Dale’s client next to that. Four hundred thousand dollars, seven months, at 0.01%. Call it thirty dollars of interest. The same money in a government money market fund over the same stretch is a materially different number, and the client would have had it without taking on anything that requires a conversation about risk.

The market already knows. That $7.91 trillion in money market funds is not institutional money, a large share of it is retail and advisor directed, and it got there because somebody looked at a sweep rate and moved. Schwab’s own CFO told analysts that transactional sweep cash rose $24.2 billion in the second quarter on demand for long short strategies and organic asset gathering, so the balances keep growing regardless.

This is the one that should sting a little. The insurance change happened to you in August. The yield gap has been happening to your clients every month for three years, and the notice is just the first time it arrived with a date attached.

The Four Question Cash Review We Run With Advisors

So run the review. We call it the four question cash review, and the order matters more than the speed.

1. What is this cash for. Spending inside six months, a reserve with no date on it, or money that never got invested and nobody remembers why. Three different answers with three different homes. Most advisors have never asked the third one out loud and it’s where the balances hide.
2. What is it earning. Look up the actual sweep rate on the actual statement rather than the rate you remember. Then look up what a government money market fund at the same custodian pays this week. The gap between those two numbers, times the balance, is the number you bring to the client.
3. What is actually insured, and how much of it. Only worth the effort above $250,000 in idle cash. Under that, answer the question if the client asks it and don’t raise it if they don’t.
4. What moves it, and when do you look again. The failure in Dale’s book wasn’t judgment, it was that nothing in his process ever surfaced the balance. Put a cash line in the review agenda with a threshold on it, something like flag any household holding more than 5% of assets in cash, and the question asks itself next quarter instead of waiting for a rental property to show up.

Step four is the whole thing. One and two are a good afternoon. Four is what keeps the same four hundred thousand dollars from sitting there again next January.

What To Tell A Client Who Forwards You The Notice

Some of them will forward it. Here’s the short version to have ready.

Their coverage is changing form and, for most of them, not changing in any way they’d ever feel. If they’re carrying more than $250,000 in cash at Schwab, tell them so plainly, walk the two numbers, and offer the phone call that keeps them on Bank Sweep if they want it. Then move directly to the part that’s actually worth money, which is what that balance is earning and whether it should be sitting there at all.

Don’t lead with reassurance. Clients can hear an advisor smoothing something over, and the notice they just read put the words not FDIC insured in a footnote. Lead with the number.

Cash is the last unmanaged asset class in most books. It has no policy, no rebalancing rule, no review trigger, and it’s the one line on the statement the custodian is quietly monetizing. Schwab just gave you a reason to open the file. Staffing, process, and the parts of the practice nobody schedules are the same conversation from different angles, and we cover all of it on our practice management page.

Our goal is to make sure advisors know what options are available and make it easier to find those options. Dale’s client got the money moved in April. Most books have a version of that client and most advisors find them by accident.