Fidelity Stokes New-Account War, Offering 1.9% on Client Cash

(Updates with Vanguard saying it offers a money-market sweep account with a higher yield than Fidelity’s to brokerage customers.)

Fidelity Investments on Wednesday said it will automatically sweep cash in new client brokerage and retirement accounts into a government money market fund yielding 1.91%—far higher than many competitors.

The move, when banks have been lowering yields following the Federal Reserve’s 25-basis-point cut last week, escalates battles among discount brokerage firms and creates new incentives for self-directed investors to shift their accounts, consultants said.

The Boston, Massachusetts-based brokerage unit of the giant fund company said the yield on its core cash sweep for new accounts is 47 times higher than what TD Ameritrade offers, ten times Charles Schwab’s and 27 times E*Trade’s.

“I am not surprised to hear that Fidelity is offering better interest rates,” said Greg O’Gara, senior wealth management analyst at Aite Group. “They continue to try to reach out to their client base and prospects by offering superior product alternatives in a down market environment.”

Schwab, which offers sweep yields of 0.18% to 0.61%, did not comment on whether the firm will seek to raise its rate, but spokesman Mike Peterson said the company does not recommend clients keep cash in sweep vehicles for long periods.

“Purchased money market funds will generally pay higher interest yields than any sweep vehicle,” he wrote in an email.

Peter Crane, whose Crane Data tracks money-market fund returns, said the cash sweep yield Fidelity is offering is within spitting distance of the average 2.12% in his firm’s index of 100 retail money-market funds.

“It’s a shocker,” he said.

TD Ameritrade spokeswoman Becky Niiya said the company considers money-market funds a riskier cash-sweep alternative than bank accounts it offers, noting they are protected by “at least $500,000” of FDIC insurance coverage.

“As a client-first company, offering our clients choice is important and that’s why we do not choose investment securities (like a money market fund) for our clients to be automatically invested in,” she wrote in an e-mail. “In this current time of economic uncertainty, investors should take time to educate themselves on the trade-offs between an FDIC insured account and a higher-yielding account that is not.”

TD Ameritrade’s core sweep account has an annual percentage yield of 0.04%, according to Fidelity.

A spokesperson at E*Trade, whose default sweep account currently yields 0.07%, did not respond to a request for comment.

“[T]he significance of this cannot be overstated,” Michael Kitces, a partner at Pinnacle Advisory Group and head of XY Planning Network, wrote in a tweet on Fidelity’s move, opining that competitors that sweep cash into their own banks will be loathe to follow.

“It is a shot at competing discount brokers, on level with Fidelity’s zero-fee wars with Vanguard,” he wrote.

Fidelity last August introduced four zero-fee index funds to its brokerage customers, and last month offered four additional funds with rock-bottom expense ratios of 0.05%.

Vanguard’s discount broker, for its part, sweeps customer cash into a federal money market fund with a 7-day yield of 2.18% that is higher than Fidelity’s, a Vanguard spokesman said.

Schwab generates more than 50% of its revenue company-wide from net interest margin on cash. Its executives last week flaunted the opportunity to increase cash-yield balances as an underlying motivation for its pending $1.8-billion deal to buy the brokerage assets of USAA. The Texas firm’s customers hold $7 billion in money-market funds that Schwab hopes to move into its bank, the executives said.

“This Fidelity announcement may be a strategy to try and get brokerage clients currently at USAA who might be thinking about switching brokerage providers,” O’Gara said.

Fidelity is not offering the high-yielding government money fund as a default sweep option to existing accounts or to customers of registered investment advisors who custody with the firm, but they can opt for it on request, a spokeswoman said.