Cash that remains in your brokerage account after buying and selling stocks, exchange-traded funds or mutual funds is typically moved into a sweep account.
These accounts automatically transfer uninvested cash into cash-like positions, such as money market funds, that earn a higher interest than just straight cash. Note that while money market funds may earn higher interest than pure cash positions, they are not guaranteed by the Federal Deposit Insurance Corp.
"Brokerages make a lot of money sweeping client cash into the brokerage's bank account and paying minimal interest while loaning it out for higher rates," says Daren Blonski, managing principal of Sonoma Wealth Advisors. "Many investors tend to keep cash in their brokerage accounts between trades so that the money is readily available should they want to make a trade," he says, but the trade-off of keeping money in cash shifted significantly in 2020.
"With the continued depreciation of the dollar and the Federal Reserve doing their best to stoke inflation, keeping a lot of money in cash or money markets can be a costly endeavor," Blonski says. "Not only did the markets do surprisingly well in 2020, but with interest rates paying next to nothing and with inflation and devaluation of the dollar, keeping your money all in cash was a very painful experience."
This makes it all the more important to pay attention to the interest rates in your sweep account, so that if you do need to keep money available, it's at least earning as much as possible.
These seven brokerages are leaders in paying interest on your cash reserves:
-- Ally Invest
-- Charles Schwab
-- TD Ameritrade
-- Interactive Brokers
Several banks also offer brokerage accounts. Ally Invest, a division of Ally Bank, a Sandy, Utah-based bank, pays 1% on uninvested cash balances in its cash-enhanced managed portfolios but zero percent on cash balances in self-directed portfolios. However, these accounts are integrated with the Ally online savings accounts via the One Ally Transfer feature so you can move cash back and forth in real time. And since Ally Bank pays a higher yield of 0.5% with no minimum account size, there's no reason to keep uninvested cash in the zero-interest bearing self-directed investment account.
Westlake, Texas-based brokerage Charles Schwab pays a slightly better interest rate for the idle cash sitting in your trading or retirement account. The brokerage pays 0.01% to 0.50%, depending on the balance in the account.
As of April 2021, the Schwab Bank High Yield Investor Savings account offers the best rate at 0.05% APY. The Schwab Bank High Yield Investor Checking offers 0.03% APY. These accounts also provide FDIC insurance up to $250,000.
"Right now it might not seem like there is a material difference in interest rates offered by various brokerages," says Ali Hashemian, president of Kinetic Financial in Los Angeles. "However, in a higher interest rate environment, the spread in rates between one brokerage and another can be substantial, especially on a large sum of money."
While Robinhood, a Menlo Park, California-based stock market trading app, has been under scrutiny recently for its trading practices, it may not be a bad place to keep your cash. The trading app pays 0.3% annual percentage yield on any amount of uninvested cash. Since there is no minimum balance required to earn the interest rate, it's easy to start stashing cash.
Changing brokerages is "actually very easy to do in our digital world," Hashemian says. "Usually this can be done online or by filling out some simple paperwork. If this is done properly, this can be accomplished with very little or no taxable consequences."
Fidelity Investments, the Boston-based retirement services provider, is unique in that it gives customers a choice of where their idle cash is held. When new brokerage and retirement accounts are opened, Fidelity will default idle cash to the highest-earning option.
Taxable accounts have three options: a government money market fund, a Treasury money market fund or straight cash. In the current low rate environment, every option is earning 0.01%. Fidelity's policy will be more meaningful once rates eventually rise. As an example, just one year ago, one of the sweep options at Fidelity was earning 1.41%.
"While zero-dollar commissions have grabbed all the headlines lately, investors shouldn't ignore the rates being paid on their idle cash, which can have a big effect on their wallet," says Robert Beauregard, a Fidelity spokesman.
TD Ameritrade, a subsidiary of Schwab that offers both trading and individual retirement accounts, pays only a nominal amount in interest. As with most brokers today, all cash positions at TD Ameritrade are earning 0.01% currently. Brokerage rates for cash are generally not competitive to online bank rates, Blonski says. Brokerages often do not offer higher rates as an incentive because they're not usually the driving force for investors.
"The individual investor is typically better off keeping large cash positions that they want to keep in true cash to be liquid in a high paying banking account," Blonski says. "Typically you see interest rate wars for cash in the pure banking channel."
TD Ameritrade uses a sliding scale for its rates, with higher balances potentially earning higher interest rates.
E-Trade, an Arlington, Virginia-based brokerage, offers various interest rates for its sweep accounts. The brokerage pays 0.01% for its cash balance program, non-retirement brokerage accounts and international accounts. Like TD Ameritrade, investors with higher balances may qualify for better rates, but right now, it's a flat 0.01% across the board.
E-Trade also provides the option to invest money into the JPMorgan U.S. Government Money Market Fund (ticker: OGVXX), a money market mutual fund, for its managed accounts. This is the only option currently earning more than 0.01%. The seven-day yield varies, but right now is now about 0.03%.
Investors who keep more money in the account are likely to receive higher interest. Interactive Brokers pays clients high rates on idle cash in their brokerage accounts automatically, says Steve Sanders, executive vice president of marketing and new product development. "There is no need to move money from account to account," he says.
Interactive Brokers pays interest based on the federal funds benchmark rate minus 0.5% for IBKR Pro and minus 1.5% for commission-free IBKR Lite. Since the federal funds benchmark is currently around 0.07%, neither account is earning any interest on cash balances. Were the benchmark to rise, however, this could change -- but to earn any interest, you must have more than $10,000 in the account. Balances of $10,000 or less earn zero-percent interest.