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Brokerage firms can benefit from uninvested customer cash, but the money does not always sit in the same kind of account. It may remain a brokerage credit balance, move to a bank deposit sweep, or be invested in money market fund shares. The destination determines who may earn income, how your rate is set, and what protections apply.
Where brokerage cash goes
FINRA defines a sweep program as an automatic transfer of free credit balances to either a money market mutual fund or an FDIC-insured bank account. A brokerage account may also keep cash as a free credit balance rather than sweeping it. Check your account’s cash-features disclosure and statement to identify which arrangement applies.
Free credit balance
Cash may remain recorded as a credit balance in your securities account. Depending on the firm and feature, it may pay interest at a rate the brokerage sets—or pay no interest. In some arrangements, the balance remains a direct obligation of the brokerage.
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Bank deposit sweep
The brokerage automatically transfers available cash to deposit accounts at one or more program banks, which may be affiliated with the brokerage. The bank can use deposits in its business, including lending and investments. Its economics generally reflect income from those activities minus deposit interest and other costs. The brokerage or an affiliate may separately receive fees or other benefits under the program.
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Money market fund sweep
The cash is used to buy shares in a money market mutual fund. The fund earns investment income, pays its expenses, and reflects the net result in its returns. A brokerage or affiliate may earn management or distribution fees if it manages or distributes the fund. Fund shares are investments, not bank deposits.
How firms can earn income—and why your rate may differ
There is no single “brokerage cash” revenue model. In a bank sweep, the program bank may earn more from lending and investments than it pays depositors, while the brokerage may receive separate program compensation. In a free credit balance feature, the brokerage may set the interest rate and earn income on use of the balance or related assets. In a fund sweep, returns arise from the fund’s portfolio income after fees and expenses, and the broker’s potential income comes through its role in managing or distributing the fund.
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As one firm-specific example, Charles Schwab’s Cash Features Program Disclosure Statement says income earned by its affiliated program banks from deposit activities is expected to exceed fees Schwab and its affiliates earn from managing and distributing Schwab Sweep Money Funds or paying interest under the Schwab One Interest Feature. That disclosure describes Schwab’s program; it should not be assumed to describe every brokerage.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallThe customer’s rate is therefore not necessarily the same as the income earned by the bank or fund. Schwab’s disclosure, for example, says the Schwab One Interest Feature rate is set at Schwab’s discretion. A fund’s yield instead depends on its investments and expenses. FINRA has reported that rates among money market funds, bank sweeps, and free credit balances have at times differed by as much as 5 percentage points in higher-rate environments; FINRA’s page does not date that figure, so it is historical context, not a current rate comparison.
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Compare the cash features in your account
Use the brokerage’s current cash-features disclosure and your account statement. Compare the actual options available to your account rather than assuming every firm offers the same choices.
- Destination: Is the cash a free credit balance, a deposit at a program bank, or shares in a fund?
- Rate or yield: What rate applies now, how is it determined, and are there balance tiers? Check whether the firm sets the rate or whether the return follows a fund’s performance.
- Bank relationship and compensation: Which banks receive deposits, are they affiliated with the brokerage, and what does the disclosure say about fees or other benefits paid to the brokerage or its affiliates?
- Choice and changes: Can you select a different cash feature, and how do you change it? SEC investor guidance says that when a broker offers choices, it must agree to the option the customer selects; availability depends on the account.
- Access and costs: For a fund, review its fees, risks, and redemption terms. Redemptions remain subject to the fund’s terms and applicable law.
- Protection: Determine whether the balance is an eligible bank deposit or a security, and read the applicable insurance or investor-protection terms.
Understand FDIC and SIPC protection
Eligible deposits at participating FDIC-insured banks may qualify for FDIC insurance. The SEC’s Investor.gov bulletin describes bank sweep coverage of up to $250,000 per customer at each participating FDIC-insured bank, subject to applicable conditions and limits. Coverage depends on the bank, account ownership category, and other deposits held there; a brokerage account itself is not thereby an FDIC-insured bank account.
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SIPC protection is distinct from FDIC deposit insurance. It concerns eligible securities accounts and does not insure money market fund shares as bank deposits, protect against investment losses, or guarantee a fund’s value. For a fund sweep, consider the investment’s risks and redemption terms separately from any applicable brokerage-account protections.
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