In the latest sign that the competition for your money is as hot as Houston in August, Fidelity Investments says that customers opening individual brokerage and retirement accounts will now automatically have their uninvested cash directed into a higher yielding money market fund. The move will especially benefit those who leave substantial amounts uninvested for a long time.
That’s contrary to the typical industry practice of sweeping the money, by default, into a low-yielding account at what’s often an affiliated bank. Just how low-yielding you’ll see in a minute.
“Some firms have removed the option of securing a higher yielding money market fund as an option for their cash, thereby forcing investors to take additional steps to get a better rate,” says Kathleen Murphy, president of Fidelity Investment’s personal investing business. “Unfortunately, that means millions of people don’t get the opportunity to have that money earn more for them.”
So exactly how much, in actual dollars, do you stand to benefit from the new policy?
Say you’re opening an account with $10,000. If you’re like many investors, research shows, not only won’t you focus on the rate paid on that cash deposit – typically, as we say, the bank cash sweep – but there’s a good chance of the following scenario playing out:
* You keep waiting for the so-called “perfect time” to actually invest the money.
* Meanwhile, while you’re waiting – and, hey, even seasoned pros sometimes hesitate to pull the trigger – life gets in the way and you’re too busy to even park the cash in a higher-yielding alternative to the sweep.
And so the cash just sits there.
And sits there.
The annual yield on that $10,000, when defaulted into a cash sweep, is a mere 0.03 percent at E-Trade, 0.04 percent at TD Ameritrade, and 0.18 percent at Charles Schwab, to cite three prominent examples as of August 11.
That works out, respectively, to $3, $4 and $18.
By comparison, with Fidelity now automatically directing the cash into its Fidelity Government Money Market Fund (SPAXX), you could earn $183 annually thanks to its much higher 1.83 percent seven-day yield, as of August 11.
The difference is even starker the more cash you’re sitting on.
Have $50,000? That works out to $915 annually vs. a cash sweep of as little as $15.
Double that to $100,000 – yes, it happens – and we’re talking $1,830 annually vs. a cash sweep of as little as $30.
There’s nothing exotic about money market funds. Though they’re not FDIC-insured like bank sweeps are, they’ve been around since the 1970s and are simply mutual funds that invest in short-term debt securities carrying low credit risk. Their underlying securities are issued by government entities or companies that borrow money and repay the principal and interest to investors within a short period of time.
The move is just the latest value enhancement by Fidelity, the nation’s largest retirement and brokerage firm with nearly $8 trillion in client assets. Last year it introduced four new U.S. and global index funds with zero expense fees, eliminated minimum amounts required to invest in any Fidelity mutual fund and 529 College Savings Plan, and did away with individual investors’ charges for things like domestic bank wires and check-stop payments.
“We’re once again rewriting the rules of investing,” says Murphy.