Cash Management in a Revived Interest Rate Environment
Your WJ Portfolio
Cash yields have finally moved from nothing to something, making management of cash balances worthwhile. For your managed investments at WJ Interests, when money sits in your account uninvested, Schwab will “sweep” those funds into a very low risk money market fund that allows you to earn some yield while your money sits. In the past we had some options as to which money market fund your cash gets swept into. We could choose the “Schwab Bank Sweep” fund (which yields 0.22% and is FDIC insured), or we could choose to have it swept in a “Purchased Money” fund (which yields roughly 1.6%-1.9% and is not FDIC insured). Recently, Schwab changed its cash management policies.
No longer do we have the option as to where the cash is swept. All accounts will default to the bank sweep feature (the lower yielding one), and if we would rather be in the “Purchased Money’ funds, we must manually place the trade. This change has already started to take place in some of Schwab’s accounts, and will be fully implemented by October 31, 2018.
This change is not uncommon amongst large Brokerage firms:
The hope of these institutions is that most account holders will not notice the change, and the institution will be able to make the difference between what the money market rate is and what they pay you (which is over 1.5% today). Generally, this is not a major issue for the assets we manage, as we do not carry large cash balances. If we were to hold cash as a strategic allocation, we would purchase the higher yielding cash fund.
Cash Assets Held Outside of WJ Interests
We know clients hold cash balances outside of the assets that we manage, whether it be for an emergency fund, waiting for an opportunity to invest, or just for peace of mind. Your overall financial success is our ultimate goal, and as a result we are working to identify some options to invest these cash balances and earn a competitive yield.
As said previously, to get the higher yield on cash, you must invest in a money market fund with no FDIC insurance. However, there are several banks that pay the money market rate, AND are FDIC insured. Rather than opening multiple bank accounts, and transferring cash between them, we have identified some firms that are developing a solution that will automatically sweep cash from your current account, and deposit it into these higher yielding banks.
The way it works is you select a minimum amount of cash that you want held in your current bank account. Any amount above that will be automatically swept into several of these banks, will earn the higher yield, and will be FDIC insured. Whenever the cash balance at your current bank dips below your set threshold, funds will automatically be swept back into it until the minimum you set is satisfied.
We believe this service can add significant value to our client’s financial lives and are hoping to offer it in the near feature. If you have any questions about how your cash is managed, or if you have cash held in outside accounts and would like to know more about this service, please contact us.