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Rating:Schwab Plots a Bank-Sweep-Switch Not Rated 5.0 Email Routing List Email & Route  Print Print
Thursday, October 27, 2011

Schwab Plots a Bank-Sweep-Switch

Reported by Neil Anderson, Managing Editor

As low money market mutual fund fees continue to plague sponsors of those funds, Schwab [see profile] CEO Walt Bettinger has decided to nudge some other cash investors into Schwab Bank.

During Schwab's interim business update for institutional investors on Wednesday, chief financial officer Joe Martinetto confided that Schwab's money fund fee waivers jumped to $160 million in the third quarter, up from $128 million in Q2.

The fee waiver are driven by perpetually low money fund yields and the need to keep the yield investors see above zero. Martinetto predicted that, if yields stay put, Schwab could face waivers of "about $165 million" per quarter in Q4 2011 and throughout 2012.

Barron's and Dow Jones both reported on the news.

So what will Schwab do? In a different cash business, the firm is already implementing a plan. Martinetto revealed that the firm is nudging Schwab One brokerage cash clients into jumping $4.5 billion to $5 billion over to Schwab's bank sweep products, which have significantly higher returns and thus allow Schwab to take its slice.

"We're getting almost 140 basis points of incremental spread by seeing that money move from the brokerage over to the bank," Martinetto stated during the update. "The letters actually went out on these to clients about a week ago." 

Correction: A prior version of this article incorrectly identified the brokerage products that Schwab is nudging into bank products. The investments in question are in Schwab One brokerage cash, not money market mutual funds. The story has been updated accordingly.

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