Fidelity Investments' edge over its competitor, Charles Schwab, may soon be diminished for a crucial segment of clientele.
Fidelity is gearing up to terminate the option for independent financial advisors to utilize its high-yielding money-market funds as the primary sweep account for the new non-retirement portfolios under their management.
By the end of this year, Fidelity’s proprietary core cash solution, known as FCash, will be the exclusive sweep account option for new non-retirement custody accounts. However, pre-existing non retirement custody accounts can maintain their money-market fund option. This revision will not impact Fidelity's retail brokerage clients, both new and existing.
The current yield on FCash stands at 2.26%, which surpasses Charles Schwab's 0.45% but is significantly less than the 5% yield offered by Fidelity money-market funds, such as the Fidelity Government Money Market fund.
Addressing the change, Fidelity commented, "We provide a competitive rate via FCash, which is a popular choice among our clients. We remain committed to delivering an unparalleled experience for custody clients, underpinned by our leading platform, specialized client service teams, and an expansive range of investment options.”
This revamped approach at Fidelity mirrors Schwab's system, wherein clients' proceeds from trades or investment income are automatically directed into the bank's low-yield sweep account. Consequently, clients must initiate trades to reallocate assets. This system mandates that Schwab clients transfer funds to money-market accounts to realize higher yields and then revert them to the sweep account for trading – a procedure that is not seamless. For advisors using Schwab's custodial services, consistently transferring funds becomes an operational challenge, particularly for those without the required staffing capacity. As a fallout, a significant proportion of custodial cash earns a mere 0.45% at Schwab.
This has been financially advantageous for Schwab, offering a cost-effective funding source at a juncture when its nearly $300 billion bond portfolio yields around 2%, reflecting considerable paper losses.
Many independent advisors have expressed their dissatisfaction with Schwab’s cash account rates, as highlighted by Barron's. This discrepancy had previously positioned Fidelity more favorably, but that leverage appears to be waning. Currently, Schwab manages assets worth $3.6 trillion for independent advisors, capturing roughly 50% of the market, whereas Fidelity holds approximately 25%.
Schwab, in a statement, expressed, “Advisors are keen to actively engage in shaping their clients’ portfolios. Our bank sweep is a gateway to diverse cash and investment solutions, enabling advisors to craft tailor-made strategies for their clientele.” Once Fidelity's new policy becomes operational, initial cash deposits for new non retirement custody accounts will be directed to FCash, and subsequent trading proceeds will follow suit. In this new system, advisors will be empowered to directly draw from high-yield money-market funds for trades, in case the cash account is depleted.
An independent advisor, managing a substantial asset portfolio, conveyed his discontent with Fidelity's upcoming shift, citing the labor-intensive nature of toggling between FCash and money funds to attain higher yields. He remarked, “Consistent transfers between accounts for RIAs, especially for those overseeing thousands of portfolios, is a monumental task.” He expressed his grievance over Fidelity’s decision to exempt its direct brokerage clientele from this policy, permitting them continued access to the high-yield sweep money fund.
Responding to the concerns, Fidelity stated, “We are committed to catering to the evolving requirements of our advisor and institutional clientele. Given the distinct needs of institutional and retail clients, the available solutions might differ for each segment.”
