What Is a Sweep Account?
A sweep account is a bank or brokerage account that automatically transfers amounts that exceed a certain level into a higher interest-earning investment option at the close of each business day. Commonly, the excess cash is swept into a money market fund.
- A sweep account automatically transfers cash funds into a safe but higher interest-earning investment option at the close of each business day, e.g., into a money market fund.
- Sweep accounts try to minimize cash drag by capitalizing on the immediate availability of higher-interest accounts.
- A sweep account service may not always be free and you might have to pay fees to your broker that might make the sweep less attractive on a net basis.
Understanding Sweep Accounts
Using a sweep vehicle like a sweep fund works by providing the customer with the greatest amount of interest with the minimum amount of personal intervention by transferring money at the end of the day into a high-interest account. In a sweep program, a bank's computers analyze customer use of checkable deposits and sweep funds into money market deposit accounts.
Some brokerage accounts have similar features that enable investors to gain some additional return for unused cash. Sweep accounts are simple mechanisms that allow any money above or below a set threshold in a checking account to be swept into a better investment vehicle. Sweep accounts were needed historically because federal banking regulations prohibited interest on checking accounts.
Sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts.
Sweep accounts, whether for business or personal use, provide a way to ensure money is not sitting idly in a low-interest account when it could be earning higher interest rates in better liquid cash investment vehicles. These investment vehicles that provide higher interest rates while still offering liquidity include money market mutual funds, high-interest investment or savings accounts, and even short-term certificates with 30-, 60- or 90-day maturities for known layovers in investments.
Businesses and individuals need to keep an eye on the costs of sweep accounts, as the benefit from higher returns from investment vehicles outside the checking account can be offset by the fees charged for the account. Many brokerages or banking institutions charge flat fees, while others charge a percentage of the yield.
Sweep accounts may not be free, and broker fees may make the account less attractive on a net basis.
Personal Sweeps vs. Business Sweeps
Sweep accounts for individual investors are typically used by brokerages to park money waiting to be reinvested such as dividends, incoming cash deposits, and money from sell orders. These funds are typically swept into high-interest holding accounts or money market funds until an investor decides on future investments or until the broker can execute already standing orders within the portfolio.
Sweep accounts are a typical business tool, especially for small businesses that rely on daily cash flow but want to maximize earning potential on sitting cash reserves. A business sets a minimum balance for its main checking account, over which any funds are swept into a higher-interest investment product. If the balance ever dips below the threshold, the funds are swept back into the checking account from the investment account.
Depending on the institution and investment vehicle, the sweep process is generally set daily from the checking account, while the return of funds can experience delays. With the changes in regulations on checking accounts, some banking institutions also offer high-interest rates on amounts over certain balances.
How Do Sweep Accounts Work?
A sweep account is a type of bank or brokerage account that is linked to an investment account, and automatically transfers funds when the balance is above or below a preset minimum. Typically, this is used to sweep excess cash into a money market fund, where it will earn more interest than an ordinary bank account. Sweep accounts can also work the other way around, moving funds from an investment account to a checking account when the owner's balance falls below a set threshold.
What Is the Difference Between Personal and Business Sweeps?
Individual sweeps are typically used by brokerages to store client funds until the owner decides how to invest the money. For example, a sweep account might move excess cash to a money market fund, where it will earn greater returns than an ordinary checking account. Business sweep accounts are often used by small companies with large cash flows. They allow the company to earn interest on excess cash reserves while ensuring that they have enough cash on hand to pay for business expenses.
Why Are Sweep Accounts Useful?
Sweep accounts, whether for business or personal use, are an easy way to ensure that money is earning a return rather than sitting in a low-interest bank account. Some institutions offer an auto-sweep feature whereby the sweep account is linked to the non-sweep account and the transfers are initiated automatically when the defined thresholds (upper and lower) are crossed.
The Bottom Line
Sweep accounts are bank/brokerage accounts that move excess money between a client's cash account and an investment account. When the monetary level in the cash account exceeds the required amount, the excess is moved into the higher interest-bearing investment account automatically. This allows the client account to earn interest on money that isn't being used.