Banks Are Now Accused of Cheating Customers Billions
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Re: Banks Are Now Accused of Cheating Customers Billions
#2Re: Banks Are Now Accused of Cheating Customers Billions
#3Key paragraph (from the original FT article):
> The issue has arisen from idle cash sitting in customer accounts at brokerage firms and large banks, which “sweep” otherwise uninvested funds into interest-bearing alternatives in order to generate income. The SEC is looking into whether the firms steered those clients into sweep accounts that paid little or no interest, and whether the financial advisers at those groups had a fiduciary duty to advise clients they could make higher returns if they moved their cash into other accounts.
Re: Banks Are Now Accused of Cheating Customers Billions
#4[deleted]
Re: Banks Are Now Accused of Cheating Customers Billions
#5Who has the best interest rates for idle cash? I have been using Marcus, but it is not a huge burden to shop around.
Re: Banks Are Now Accused of Cheating Customers Billions
#6Relevant recent Levine article on this from last week: https://www.bloomberg.com/opinion/articles/2024-08-07/ai-com...
> Cash sweep sweep
> If you go to a bank and say “I’d like to open an account and deposit some cash,” they will happily open a checking account for you, take your cash, and pay you an interest rate that is, in round numbers, zero. [4] (My checking account pays 0.01%.) If you say “no, I want a savings account, because those have higher interest rates,” they will happily open a savings account, take your cash, and pay you an interest rate that is … also 0.01%? Maybe 0.03%? But if you utter the correct series of incantations, at least some banks will open a high-yield savings account and pay you 5% or more. You gotta find the right bank, though, and utter the right incantations. Sometimes it’s tricky.
> ...
> People pretty regularly complain about this — “interest rates have gone up, why doesn’t my bank pay me more?” — and sometimes they even do something about it (they move their money to another bank that pays more, or to a money market fund). But the banks do not particularly get in trouble for it. Regulators understand that banks need cheap funding, and that if they can get cheap funding they’re supposed to take it. [5]
> If you go to a brokerage firm and say “I’d like to open an account and deposit some cash while I wait to find some good stocks to buy,” they will happily open an account for you, take your cash, and … well! They will probably pay you some interest rate that is higher than 0.01% and lower than 5%. They would prefer to pay you less, because brokerage firms also mainly make money by getting paid more interest on their cash than they pay you on your deposits. [6] Some brokerages advertise “we pay a really high rate on cash,” and thus attract customers who want to get paid a high rate on their cash. Others … don’t? Others advertise, you know, “we will give you good financial advice” or “we make trading fun” or “we have a good app” or whatever, and they get people who do not pay attention to how much they will get paid on their cash.
> On the other hand, there’s a sense that your broker has some fiduciary duty to you, or ought to, particularly if your broker is also giving you financial advice. If your broker is telling you what stocks to buy, she should probably also mention “hey, you have a bunch of money sitting idly in your brokerage account, and we’re paying you like 1%, but you could just put it into a Treasury money market fund that is essentially cash but pays 5.4%.” That would cost her firm money — it would give up your cheap cash — but would be good customer service.
> Is it mandatory? Eh, maybe a little:
(Links to the similar article, https://www.ft.com/content/de751907-c870-4b8c-b86b-317483f76... )
Re: Banks Are Now Accused of Cheating Customers Billions
#7Not only because of interest payments banks defrauding customers but also due of hidden charges.
Re: Banks Are Now Accused of Cheating Customers Billions
#8Who has the best interest rates for idle cash? I have been using Marcus, but it is not a huge burden to shop around.
It's hard to beat a decent money market fund.
Re: Banks Are Now Accused of Cheating Customers Billions
#9Key paragraph (from the original FT article): > The issue has arisen from idle cash sitting in customer accounts at brokerage firms and large banks, which “sweep” otherwise uninvested funds into interest-bearing alternatives in order to generate income. The SEC is looking into whether the firms steered those clients into sweep accounts that paid little or no interest, and whether the financial advisers at those group…
Yes. Before brokerages were part of banks, cash in a brokerage account was usually stored in a money-market fund, with whatever interest money market funds were paying. Once merging with a bank, cash was swept into an in-house bank account.
This didn't matter much when money market funds were paying near zero interest. But the zero interest rate era is over. Except for demand deposits in banks, which pay well below money market rates. Often near zero.
That's what's going on here.
It's a conflict of interest created by the end of Glass-Stegall, which kept brokerages and banks apart.
Re: Banks Are Now Accused of Cheating Customers Billions
#10Not sure if is the same, but I noticed that account interest rates that went down when the reserve rates went down didn't go back up. We opened up accounts for our kids at a local credit union that had close to 0% interest. Fast forward 2 years and the rates are just as bad or worse. Savings accounts are 0.25% compared to >4% at other credit unions.