What Is a Cash Sweep?
Key takeaways
A cash sweep is a method used by investment firms to move your uninvested cash into FDIC-insured accounts or money market funds.
This method works to your advantage—it allows the cash to earn interest or dividends while being readily available for future investments.
The amount in each cash sweep is probably small, but it’s worth knowing what you could earn and what fees you’ll pay.
Whether you have $1,000 or $1 million invested, there’s a good chance you’ll hold some cash in your investment account at some point. It might be proceeds from a sale, dividends or routine contributions. But especially when it comes to investing, you don’t want cash to sit and miss out on growth. The good news is in many cases, you may not be losing out on growth for long. Let’s take a look at what happens to that idle cash.
How do cash sweep accounts work?
Major investment firms provide an automatic service so that your cash doesn’t sit idle for long. A cash sweep moves your uninvested cash balance into an account or fund with the potential to earn a profit. That way, the money can grow.
The money moves into relatively low-risk assets like:
- Federal Deposit Insurance Corporation (FDIC)-insured accounts held at a bank,
- Taxable money market mutual funds, and
- Municipal money market funds.
You might be able to direct your money into one or more of these options.
You’ll receive a monthly interest or dividend payment. And although your cash moves around, it’s always accessible to shift into longer-term investments.
Things to keep in mind with cash sweep
Investment options vary
Firms have different investment options for their cash sweeps, so the rates can vary. We have a variety of options at Northwestern Mutual Investment Services, including taxable and tax-free money market funds and an FDIC Insured Deposit Program.
Accounts can be insured up to a limit
If you choose an option that is FDIC insured, your money is protected if a bank fails. But keep an eye on the limit. For example, at Northwestern Mutual Investment Services, your account is FDIC protected up to $5 million.
You may pay a fee
You’ll typically pay a fee for cash sweep services. So make sure you know what you are earning and what you might be paying for.
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Advantages and disadvantages of cash sweep accounts
In general, an automated cash sweep works to your benefit. Here are some advantages and disadvantages to keep in mind.
Advantages
- Once it’s set up, all you have to do is stay aware of it. The investment firm automatically does the work for you, sweeping through your account each day and moving uninvested money.
- You might have some control over where the sweep goes. For example, you might be able to select which financial product your uninvested cash goes into.
- You can put this money to work for you and may earn dividends or interest on cash that would otherwise be uninvested.
- Compared with all possible investments, the money is invested in relatively low-risk accounts.
- If you have a cash sweep with your brokerage account, you can use that cash to invest right away instead of waiting for a bank transfer.
Disadvantages
- You’re (usually) charged a fee, and the fees at some investment firms could eat into your returns.
- You shouldn’t rely on the automated cash sweep process for long-term investments because they involve conversative investment vehicles with lower return potential.
A Northwestern Mutual financial advisor can help you understand how cash sweeps work and how they fit with other financial tools. That way, you’ll feel more confident about reaching your financial goals.
Let’s build your investment plan.
Your financial advisor can get to know you and help you build a personalized investment plan. Together, you can explore ways to grow and protect your money.
Find an advisorNo investment strategy can guarantee a profit or protect against loss. All investments carry some level of risk, including the potential loss of principal invested. Financial representatives do not give legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.
Cash sweep product yields fluctuate. FDIC-insured deposit programs are not covered by the SIPC. Money market funds are subject to SIPC coverage limits, but money market funds are not insured against market loss. An investment in any money market fund is not insured or guaranteed by the FDIC or any government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.
Clients should refer to the appropriate prospectus or NM FDIC Insured Deposit Program Disclosure Statement for important information.
