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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Fri Feb 16, 2007 1:20 pm Post subject: Brokerage account cash balances - Use Savings accounts |
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Here is another example of how our stock brokers do not have their investors' best interest at heart. Brokerage firms have discovered that they can pay a very low rate to investors for their excess cash and then invest that cash in higher yielding alternatives. This is great for the brokers as many of them are reaping substantial profits from reinvesting their client's excess cash. Meanwhile their customers are receiving substantially less. According to a recent Wall Street Journal article “How Wall Street Sweeps the Cash,” January 7, 2007, Brokers pay as little at 1.5% when their money market funds are paying as high as 5%. Small investors are receiving the short end of the deal.
It seems that the problem is investors are more focused on where the market is going and what stocks to buy, than on where to invest their excess cash to gain a higher return. Properly investing your excess cash helps increase overall returns. Unfortunately, like so many other investing ideas, there are important issues that must be considered before committing you money.
Considerations
Just so everyone knows, the cash we are considering are the available funds in your brokerage account that has not been committed to a stock position. This cash needs to be made available on fairly short notice should you wish to make a buy. Also, investors are looking to increase the return on this cash without taking on more risk or incurring unnecessary expenses. Basically we are talking about short term investments that offer a better return than we get from the broker, yet we can access the money quickly.
The actual return will vary depending primarily on the level of short term interest rates and to a lesser extent the firm that is offering the product. Also, different products may have different fees and expenses. Money Market Funds like mutual funds charge an expense that is paid before any return is computed. Others may charge a transaction or load fee. And then your broker may charge a fee to buy and sell the product. As always it is important to read the fine print before making an investment decision.
Traders, who trade very often, need quick access to their available cash should they wish to make a trade. Investors, who are looking for good opportunities and are not trading frequently, night be able to wait a few days before deploying their cash on a trade. This is an important consideration since several of the options can take up to five days before your cash is available for investing. For example, the following statement is from a well known on line broker and is representative of the policies in place when transferring money from one account to another.
“ If the destination account is a brokerage account, you may use the funds you transfer for trading after the 5th business day from when the transfer request is received.”
Several other brokerage firms have the same or very similar policy. I did not check with every firm, so there may be a few who do not place a hold on the funds until they have “cleared.” Part of this restriction may come from a securities settlement rule commonly known as “T+3” – shortened for “trade date plus three days.” This rule means that when you buy securities, the brokerage firm must receive your payment no later than three business days after the trade is executed.
The point is you need to check with your broker to determine how long you must wait to use your funds if you transfer them from another account, either within the firm or from an outside institution. Also, keep in mind that this will impact your total purchasing power if you use margin.
ALTERNATIVES
There are basically three alternatives that are available, besides keeping the cash in the existing low rate account. These alternatives are Money Market Funds, Exchange Traded Funds (ETFs) and Direct access savings accounts. Each of these alternatives offers advantages and disadvantages.
Money Market Funds
Like any other mutual funds, a money-market fund has professional management, has some expenses, etc. The return is usually slightly more than banks pay on demand deposits, and perhaps a bit less than a bank will pay on a 6-month CD. Money-market funds invest in short-term (e.g., 30-day) securities from companies or governments that are highly liquid and low risk. As of the day of this article, the largest money market funds are paying 4.7 – 5.10 percent.
Keep in mind that your broker may charge an early redemption fee if you sell your shares in the fund before a set time period, such as 90 days. If true then you need to factor in this cost to the total return. Check with your broker to determine their policy. For some fund companies, this fee is be waived.
http://www.marketoracle.co.uk/Article354.html |
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