Fidelity's Amped-Up Cash Sweep: Gain for Investors, Pain for Advisors?

Fidelity made a big splash early Wednesday, offering new do-it-yourself investors an automatic 1.91% on their cash (and blasting the news out via a one-page ad in the Wall Street Journal). But Fidelity-affiliated advisors will have to request the move of their clients' cash into higher-yielding investments, rather than it being automatic, which industry observers say is a headache for some advisors.

"Seems RIA custodians aren't ready for disruption to their RIA cash cow yet. :/" said popular blogger and financial planner Michael Kitces on Twitter.

"You've got to think advisors would be in an uproar" if they didn't get this automatic cash-sweep program for their clients, according to Tim Welsh, head of the consulting group Nexus Strategy and a former Schwab executive, in an interview. "It will definitely create channel conflict, and a challenging messaging point."

Retail vs. RIAs

It's an interesting juxtaposition for Fidelity — which is clearly trying to jump ahead of rivals such as Charles Schwab, TD Ameritrade and E-Trade on the retail or DIY side of the business. Yields on some rival sweep programs are roughly 0.20% or less for accounts with balances under $1 million; Vanguard, though, offers brokerage clients 2.18%.

"Some firms have removed the option of a higher yielding money market fund as an option for their cash sweep, thereby forcing investors to take additional steps to get a better rate for their cash," said Kathleen Murphy, president of Fidelity Investments' personal investing business, in a statement.

But when asked why Fidelity isn't extending the automatic high-yield cash-sweep program to advisors, a spokesperson said: "The offering differs for advisors because they've told us that they want the ability to choose the cash option that is right for their customers, so they have multiple cash options available for their customers, including money market funds and our FDIC-insured Bank Deposit Sweep Program."

At present, Fidelity Government Money Market pays 1.91%, Fidelity Treasury Money Market 1.93% and Fidelity Government Cash Reserves 1.96%.

Headaches, Heartaches

"Hearing a lot of advisors point out that we can already CHOOSE to invest into higher-yielding cash or cash-alternative options on RIA custodians. True, but not as a default. It REQUIRES extra work," Kitces explained in a tweet.

This approach, he adds, is one "which effectively means RIA custodians are trying to default advisors' clients into something less beneficial to them, while creating hurdles they knowingly hope and expect not all RIAs to clear. Is this really what we should expect as fiduciaries from our service providers?"

A Fidelity spokesperson, though, insists there is no additional paperwork involved with its higher-yielding cash options and that advisors can make a phone call to request the switch on behalf of their clients.

To Welsh, "Advisors want … a default sweep" to make things easier for both themselves and their staff, instead of having to take the time of calling a custodian or clicking on a website.

Kitces points out that this move could put the most stress on smaller advisory firms. Overall, though, he concluded on Twitter: "Hard to see how 'we've created a system that deliberately forces advisors to do extra work or their clients suffer' can be considered a healthy alignment between fiduciary advisor and their RIA custody platform. Instead, it's a pitched battle, our clients vs their margins. :/"