Fidelity Investments plans to shift the way independent financial advisors manage uninvested client cash, potentially impacting investor returns.
Starting in 2025, Fidelity will transition client cash held in non-retirement brokerage accounts managed by independent financial advisors to FCash, its proprietary sweep account. As of November 11, FCash offers an interest rate of 2.32%, significantly lower than the yields provided by many money-market funds. These high-yielding funds have long been a preferred settlement option for registered investment advisors (RIAs) who custody client assets at Fidelity.
This change follows a 2023 policy requiring new non-retirement accounts opened by advisors to use FCash. Existing accounts were previously exempt from this requirement, but Fidelity now intends to include them under the new rules.
A Fidelity spokesperson confirmed the policy shift, stating that the update is designed to ensure consistency for customers. Sweep accounts, she explained, are primarily for temporarily holding balances awaiting reinvestment, and advisors still have access to other options for managing long-term client cash.
For instance, Fidelity provides a feature allowing advisors to automatically draw from a Fidelity money-market fund to settle trades if FCash balances are insufficient.
“Advisors retain the flexibility to direct client cash into other investment vehicles like money-market funds, enabling them to align cash management strategies with their clients’ financial goals,” the spokesperson noted. She added that Fidelity is giving advisors ample lead time to adapt to these procedural changes.
The policy update, first reported by Citywire, underscores the evolving landscape for RIAs.
Implications for Advisors
Although the changes do not affect retirement accounts or retail investors, they carry significant weight for RIAs. Fidelity is one of the largest custodians of independent advisor assets in the U.S., second only to Charles Schwab. Advisors depend on custodians for safekeeping assets, as well as for technology and asset management support. Switching custodians, however, is a complex and time-consuming process, making it an infrequent decision for most advisors.
Cash management options vary widely across custodians. Schwab’s default sweep accounts, for example, currently pay just 0.1%, according to its website. Interactive Brokers offers up to 4.08% on cash balances exceeding $10,000, provided the account has a net asset value of at least $100,000. Vanguard provides two settlement options: a cash deposit account yielding 3% and a money-market fund (VMFXX) with a yield of 4.57%.
Money-market funds, while slightly impacted by the Federal Reserve’s recent rate cuts, remain attractive for clients seeking to earn higher returns on idle cash. These funds are particularly appealing for investors who prefer to keep their cash earning interest while waiting for favorable investment opportunities.
According to the Investment Company Institute, money-market funds hold a record $6.7 trillion in assets. Fidelity’s Government Money Market Fund (SPAXX) has a 7-day SEC yield of 4.26%, slightly below the average yield of 4.44% reported by the Crane 100 Money Fund Index, which tracks a broad spectrum of money-market funds.
Strategic Considerations for RIAs
The new policy may prompt advisors to reassess their cash management strategies, particularly for clients holding substantial non-retirement assets. The lower yield on FCash compared to money-market funds could pressure advisors to actively manage client cash to maintain competitive returns.
While Fidelity’s changes aim to simplify processes, advisors will need to weigh the benefits of using FCash against the potential opportunity cost of not allocating cash to higher-yielding alternatives. The added administrative task of moving funds between FCash and money-market funds may also factor into their decision-making.
In an environment where cash yields play a critical role in delivering value to clients, advisors must navigate these changes thoughtfully to align with their clients’ best interests and financial objectives.
