Two weeks after it was sued for a program in which it makes money on parked client cash, LPL has been sued again by another client for the same reason.
These accounts, known as cash sweeps, have recently sparked a firestorm of controversy that’s engulfing the brokerage industry and forcing companies such as LPL, Wells Fargo, Ameriprise and Morgan Stanley into court.
Douglas K. Nevitt of Illinois filed suit against LPL yesterday in the U.S. District Court for the Southern District of California that seeks class-action status. LPL was sued by a client from Michigan in the same venue on July 17. In the new suit, Nevitt, a 66-year-old ex-client, said he kept a managed advisory retirement account at LPL from 2020 to 2022
The two plaintiffs both say that LPL profited off the client cash it swept into bank networks, money that substantially increased the company’s net interest income. Cash sweep accounts, which are mainly meant for short-term cash held for transactional reasons, were relatively uncontroversial during the zero-interest-rate era. But now that interest rates are much higher, clients are calling foul, saying they could have been making much more money on their parked cash in vehicles such as money market funds or CDs.
Nevitt referred to LPL’s disclosure booklet explaining the program, called “Insured Cash Account.”
“Under the ICA program,” said LPL’s booklet, “LPL Financial, acting as your agent, will automatically transfer (or “sweep”) available cash balances in your eligible accounts—including proceeds of securities transactions, dividend and interest payments, cash deposits, and other monies—into interest-bearing deposit accounts insured by the Federal Deposit Insurance Corporation. The deposit accounts will be held at one or more banks or other depository institutions identified on one of two priority bank lists maintained by LPL.”
According to LPL’s literature, these sweep accounts pay clients 0.35% on up to $150,000 in holdings. It’s staggered after that and goes up to 2.2% on cash balances above $10 million. Nevitt’s complaint argues that companies like Vanguard and Interactive Brokers pay much more on sweeps—4.6% and up. When these and other cash equivalents pay so much more, according to Nevitt, it means LPL was not meeting its fiduciary requirements to clients under Reg BI but instead putting its own bottom line first, the suit argues.
The complaint says, “When clients are in the LPL cash sweep program, LPL pays and/or secures rates of interest on the client’s cash balances that are neither reasonable nor in compliance with its legal duties.”
Just this week, Wells Fargo and Ameriprise faced similar lawsuits over their cash sweeps. Wells Fargo and Morgan Stanley have both said they’d raise their rates on cash sweeps while Ameriprise and LPL said they’re staying the course.
An LPL spokesperson responded to the matter this afternoon: “Designed primarily for short-term cash holdings, our FDIC-insured cash sweep vehicles prioritize security, liquidity, and yield—in that order. We also offer investment options suitable for a longer-term horizon, such as money market funds, CDs, and fixed income funds. This flexibility allows our clients to tailor their investment strategies to align with their risk tolerance and financial goals.”
President and CEO Dan Arnold also made a statement on the matter during the earnings call last week about firms that had raised their rates in response to the controversy: “As for the firms that have made changes, they have different business models and monetization practices, so we can only speculate as to the issues they may be facing,” Arnold said. “As it relates to LPL, we continuously strive to ensure that advisors have choice in the tools and products they use to serve their clients.”
Last week, LPL released its second quarter results, and though it beat earnings estimates, its diluted earnings per share were actually down last year, to $3.23 from $3.65 at the end of June 2023, which analysts have attributed to higher expenses. Net interest income—which includes cash sweeps—is a bright spot on LPL’s balance sheet. In March, the firm revealed that its net interest income had more than doubled, rising to $159.4 million for the year, up from $77.1 million the year before.
“During the rising interest rate environment from March 2022 through the present, LPL’s net interest spread has grown exponentially: from 2022 to 2023 LPL’s net interest income increased by 107%,” writes Nevitt.
LPL said in its April earnings presentation, “We generate compelling economics on client cash balances.”
Analysts Weigh In
In a recent equity research note issued by William Blair on July 19, analysts Jeff Schmitt and Tyler Mulier calculated the hit that LPL could take if it were forced to raise rates to the same low end offered by other institutions, given its current $23 billion in uninvested client cash sitting in advisory accounts (as opposed to non-fiduciary brokerage accounts).
“Assuming the sweep rate on exposed client cash is increased from 0.85% to 2.5%, this would reduce the company’s spread income by around $380 million,” the William Blair authors wrote. “This represents roughly $3.80 per share of earnings, which would reduce our 2025 adjusted EPS estimate from $19.75 to $15.95.”
Caydee Blankenship, an analyst at CFRA Research, wrote the following in an email to Financial Advisor:
“While LPL (along with other brokerages) may face increasing pressure to raise rates on its cash sweep programs due to regulatory, litigation, and competitive factors, we think it is unlikely that cash sweeps rates will match short-term reference rates (money market/fed funds rate) because these products are different. We do expect cash sweep rates to go up, but believe the industry can avoid most regulatory issues with bank deposits rates staying between 1%-2%.”
(This story has been updated with a comment from LPL.)