As the subject of cash sweep money engulfs the broker-dealer and wirehouse industries, another high-profile B-D, Ameriprise Financial, has been sued in federal court by two people who said they were underpaid for the money they’d parked in short-term transitional accounts, known as cash sweep accounts.
The suit, which was filed as a proposed class action, was filed just a few days after the CEO of Minneapolis-based Ameriprise said in an earnings call that the firm had no plans to change the fee structure on these accounts.
Plaintiffs Susanne Mehlman and Joy Hultman filed the lawsuit against Ameriprise in the U.S. District Court for the District of Minnesota, claiming that the company and its subsidiaries “used clients’ cash balances to generate massive profits for themselves while shortchanging their clients.”
This isn’t the first such investor lawsuit to go after cash sweeps. Just two weeks ago, LPL was sued by a Michigan customer in a Southern California court for similar reasons. That plaintiff, Daniel Peters, also seeks class action status and said his uninvested, parked money had been swept into bank accounts and that he and other customers “did not have a choice whether or not to participate” in these programs.
Sweep programs take uninvested client money and move them into interest-bearing accounts, sometimes overnight, to earn money while they sit. The accounts are meant to be short-term in nature, parked as clients move them to other, longer-term securities. In the past, when interest rates were near zero, cash sweeps were a boring and little-discussed feature of broker-dealers’ bottom lines, but since interest rates have risen under a Federal Reserve program to combat inflation, financial services companies’ net interest income has boomed, and customers are realizing that their cash that’s sitting drawing shallow short-term rates of 0.3% could have been making much more in a money market fund or CD. (The Ameriprise suit compares these rates unfavorably to 4.6% rates paid by Vanguard.)
“Ameriprise makes more money when its clients’ funds are invested in the Ameriprise cash sweep program rather than in similar cash options and equivalents,” the Mehlman-Hultman complaint says. “Moreover, when clients are in the Ameriprise cash sweep program, Ameriprise pays and/or secures interest rates on the client’s cash balances that are neither reasonable nor in compliance with its legal duties.”
“Under Ameriprise’s own analysis, an interest rate increase of 100 basis points from 2022 to 2023 would result in an estimated $1.22 billion increase in revenue for Ameriprise,” says the Mehlman-Hultman complaint.
According to both the Ameriprise and LPL suits, these rates did more than merely shortchange clients but also breached the firms’ fiduciary duty.
“Under the common law fiduciary standard, Reg. BI, and Ameriprise’s own contracts incorporating the federal statutory requirements, Ameriprise has a duty to act in the best interests of its clients and to secure reasonable interest rates for its clients’ cash balances through a reasonable cash sweep program or reasonable cash equivalents—such as government money market funds available to Ameriprise clients,” the lawsuit said.
Other firms have responded to the outcry by lifting rates. This month, both Wells Fargo and Morgan Stanley said they were raising their rates on sweep accounts. To give some sense of the amount of money at stake, Wells Fargo said in an earnings call that the move would cost it $350 million in net interest income.
However, both LPL and Ameriprise said in their earnings calls last week that they weren’t budging on their own cash sweep figures.
“Looking at sweep and transactional assets or cash in motion, [Ameriprise’s activity] is totally appropriate and in line,” said CFO Walter Berman on an earnings call. “I can’t comment on what’s taking place with the wirehouses [that have been forced to make changes]. I can’t understand it. All I know is what we do from that standpoint and all the actions we have taken to ensure that the money in sweep is for transactional purposes.”
Berman and CEO James Cracchiolo reiterated past stats that said the average size of these accounts was $6,000 and that 65% of them were $100,000. (Ameriprise generally pays 0.3% on cash sweeps up to $100,000 in holdings, at which point they start paying more, 0.5% and up, on a staggered basis.)
When contacted by Financial Advisor, an Ameriprise spokesperson reiterated that these are short-term accounts.
“Our cash sweep is intended for money in motion, not as an investment option for significant cash balances over extended periods. Our programs comply with legal and regulatory requirements,” the spokesperson said.
Last September, RIA AssetMark had to settle a complaint with the Securities and Exchange Commission for $18 million over accusations it had received millions from third-party custodians in revenue sharing arrangements for its cash sweep programs.