Kirby on Finance

How your broker is ripping you off!

If you’re like me - you’ve got money sitting in your brokerage account waiting to be used on your next investment. I’ve justified this in the past because I feel like the more money I have in my brokerage the account, the “more serious” an investor I am. This silly logic is hitting me where it hurts - my bottom line. Check out the measly amounts of interest some of the major brokerages pay for money kept in a money market account as reported by MSN Money:

TD Ameritrade Holding pays just 0.1% on cash balances of up to $5,000 if you don’t ask them to give you a better deal. For cash balances up to $25,000 they pay just 0.4%. Up to $100,000 they pay 1.65% — even though the going return on money market mutual funds is around 4.8%. Ameritrade gathered $185 million in revenues by paying clients so little on their idle cash and then “sweeping” it into an account run by a banking partner, where the money earned Ameritrade a much higher rate. On average, clients held $5.7 billion a day in cash during Ameritrade’s last fiscal year, which ended Sept. 30.

E*Trade Financial pays the same as Ameritrade for the first two tiers, but for cash balances between $25,000 and $100,000 it pays out only 1%. On average, the broker paid just 0.87% on the $10.3 billion-a-day average that clients kept in brokerage accounts in the third quarter of 2006.

Charles Schwab pays around 1% on cash balances if you have up to $100,000 in assets, unless you ask them to do better. It pays around 2.6% if you have more than that. Overall, Schwab paid clients 2.56% in the third quarter of last year. Schwab earned about 5.1% and pocketed the difference.

Those numbers are pretty pathetic. I think it’s a shame that brokers don’t offer their customers a more reasonable return on their money. Sarah Bulgatz, who’s a Schwab Spokesman explains the “issue” by saying, “We really like having this conversation with our clients and educating them on what they can earn on their cash.” You see, they’re actually doing us a favor, by ripping us off!

Don’t give your broker a free loan [Michale Brush - MSN Money]

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