ASK
ANDI : Put your company’s money to work
By ANDI GRAY
Question:
It’s the new year and I want to get off on the right
foot, doing a good job at banking and managing my company’s
finances. I’ve heard about sweep accounts as a tool
to earn interest on money that is sitting around. We
regularly have cash in our checking account, waiting
for checks to come in and bills to be paid. It seems
like a waste to have money being unproductive. Can you
tell me about sweep account, and when to use them?
The
purpose of a sweep account is to put money to work overnight,
without having to take any specific action. A company’s
checking account is linked to an investment account,
both held at the same bank. Overnight, extra money held
in the checking account is moved or “swept” into the
investment account, in order to earn interest on the
extra money. When funds are needed in the checking account
to cover incoming checks, the funds in the investment
account are “swept” back into the checking account.
Neither the customer nor the bank has to take any action
to have the sweep take place -- it’s automatic.
Sweep
accounts were originally created to get around old government
laws (part of the Federal Reserve Act of 1933) that
prohibited banks from offering interest on business
checking accounts. The product started in the 1980s,
when sweep accounts were marketed only to large corporate
clients, by large commercial banks. As of 2000, sweep
accounts consisted of $270 billion in assets under management.
Today, money market funds account for nearly 40 percent
of all sweep accounts. Other types of sweep accounts
include commercial paper, federal funds, offshore instruments,
trust instruments and loan or credit sweeps, to name
a few. Both large and small banks offer sweep accounts,
smaller banks having almost twice the dollars of bank
deposits, as compared with the large banks.
The
benefits of sweep accounts for companies include earning
interest on funds while having access to those funds
to pay bills, without having to manually intervene to
move money from checking to savings, or vice versa.
For clients worried about safety, break investments
into a variety of accounts, each with under $100,000
on deposit -- the limit for FDIC insurance. Depending
on the bank and the program, the client’s funds may
be swept into a larger cash pool, allowing for higher
rates of return. In the case of a loan or credit sweep,
overnight sweeps reduce the amount outstanding on a
credit line, thereby reducing interest charges -- which
are usually greater than any interest the company may
earn.
Ask
about the details
Today,
banks offer sweep accounts as a competitive strategy.
What they offer varies greatly and as a buyer you have
to carefully check the details. Questions to ask include:
+
what are the balances that trigger a sweep;
+
what kind of minimum is required in my checking account,
sweep account;
+
what investment fund options are available;
+
what interest rate is paid and are there any tiers to
the interest paid;
+
what fees does the bank charge for the service -- one
time, per transaction, monthly fees, etc.;
+
how is interest accrued and paid;
+
what types of investment funds are available; and
+
what requirements are tied to specific fund options?
Banks
want to maintain some money in your checking account,
as that is where banks make money -- funds on deposit
that do not pay interest. The three drivers of profit,
both for the bank and for the client, center around
fees, target balances and interest rates.
Banks
realize several advantages by offering sweep accounts,
primarily competitive. Clients are more likely to leave
greater overall assets with the bank to support the
sweep-account process, as opposed to moving funds to
other investment options. Money market sweeps move funds
off the bank’s balance sheet, lowering the capital the
bank needs to have on hand to meet stringent banking
requirements. Sweep accounts do generate fees, plus
a spread between the interest paid to the client and
the interest the bank realizes -- estimated by some
as four times the fee income. Finally, by building a
closer working relationship with a client, the bank
is likely to expand the total amount of services it
sells to that client.
One
place that clients have to beware is in the selection
of investment accounts. Some investors have claimed
that brokers steer them to accounts on which brokers
received high commissions, even though those accounts
paid the client lower interest. Clients must remember
that an investment company, or bank, is in the business
of creating and selling products. It is up to clients
to shop for the best product to meet their individual
needs and to carefully investigate all of the details
of how that product works.
Looking
for a good book? Try Dictionary of Banking
Terms by Thomas P. Fitch.
Andi
Gray is president of Strategy Leaders
Inc., a business consulting firm that specializes
in helping entrepreneurial firms grow. Do you have a
question for Andi? Please send it to her, via e-mail
at AskAndi@StrategyLeaders.com,
or by mail to Andi Gray, Strategy Leaders Inc., 5 Crossways,
Chappaqua, N.Y. 10514. She can also be reached by phone
at (914) 238-3500.
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