Automatic Sweeps in Banking and Brokerage
An automatic sweep is a programmed order to execute standing instructions that move funds from one account to another. This serves as a convenience for the client, relieving him or her of the need to enter separate instructions each time a transfer of funds is required or desired, or to write and deposit checks. Many applications of automatic sweeps exist, some of which are described below.
A Banking Scenario
Your bank checking account could have an automatic sweep feature that moves funds to a higher-yielding deposit account such as a money market account (not to be confused with a money market mutual fund) when the balance goes above a given level, one either set by the bank or chosen by you as the depositor.
Additionally, the sweep feature may also work in the opposite direction, moving funds from the higher-yielding account to your checking account when the latter's balance has dipped below a specified level.
The Brokerage Scenario
Within securities brokerage firms, a traditional cash account pays no interest on cash balances, encouraging clients who are not active traders to keep such balances close to zero.
To spare the client and the financial advisor the inconvenience and costs associated with manual withdrawals of funds (especially if the client is to be given a check for deposit elsewhere, such as in a fund), an automatic sweep of funds into an interest-bearing account is often offered as an optional feature.
Additionally, the basic structure of the central asset account at a typical brokerage involves the addition of an automatic sweep into the traditional cash brokerage account, plus other features as well.
Cash balances typically accumulate in a securities brokerage account as the result of:
- Proceeds from securities sales
- Income (dividends, interest, etc.) and distributions from investments held in the account
- Funds deposited in anticipation of securities purchases
Even with central asset accounts that earn interest on cash balances, the client still may desire to set up automated sweeps. In particular, the client may need to have cash from dividend and interest payments in one account regularly moved into another for reasons such as these:
- Because the second account is the one from which the client writes checks, makes ATM withdrawals and makes credit card charges, and investment income from the first account is needed to cover these debits.
- The first account may be a trust account from which the client, as trustee, is obligated to make regular payments of investment income to the holder of the second account.
Evolution of Brokerage Sweep Accounts
Originally, brokerage sweep accounts used money market funds as their linked interest-bearing accounts. Over time, the corporate treasury departments in leading brokerage firms saw benefits in creating or buying banking subsidiaries and guiding the sweeps to deposit accounts offered by them, rather than to money market funds.
That way, the customer deposits could supply working capital, and reduce the need for higher-cost commercial paper or long-term debt as sources of funding, a second-best alternative to free credits.
In contemporary sweep accounts, the flow of funds automatically goes both ways. Funds are automatically deducted from the interest-bearing linked account when they are needed as payment for securities purchases, checks, and credit card-debit card-ATM card transactions.
Most of the leading securities firms either have been acquired by large banks or have been reorganized as bank holding companies themselves as a way to qualify for TARP bailout funds in the wake of the 2008 financial crisis. This has accelerated the push towards targeting the sweeps to banking accounts offered in-house.
Curiously, and inexplicably, even the leading brokerage firms have failed to program capabilities for truly automated sweeps of dividends and interest between accounts. Instead, the journal entries to create these sweeps often are calculated and entered manually by brokerage staff, typically sales assistants, at the close of each month.
Given that genuinely automatic (i.e., programmed) reinvestment of dividends into additional shares of stock or mutual funds has been around for decades, this lack of basic functionality is especially remarkable. Rather, truly computerized pre-programmed automatic sweeps between brokerage accounts tends to be confined to set dollar amounts moved on a monthly basis.