Finance: An Ala Carte World

Amidst some fanfare Charles Schwab announced this month that its customers will pay no commissions on trades.

WSJ columnist Jason Zweig explains how the firm can afford to do so: customers leave $billions of their cash in "sweep" accounts that pay nearly zero. The almost-interest-free loan that Schwab gets from these accounts dwarfs any commission that it could earn on trades.

Schwab can offer such cheap options partly because of how it handles investors’ cash. The firm automatically sweeps idle cash not into money-market mutual funds or other assets that could yield about 2% at today’s rates, but into its own bank, which pays peanuts....

As of June 30, deposits at Schwab’s bank totaled $208 billion. This week, clients were earning between 0.12% and 0.55% on those balances.

Working for nearly 2% extra is a small step for a man but a giant
leap for Schwab's earnings (Crane Data via WSJ)

Last year we noted how Charles Schwab (whose services we like, by the way) was paying us a paltry 0.2% on our cash balances. This year we've begun managing our accounts again, i.e., monitoring the balances, transferring cash to higher-yielding (2-3% -- whoop-de-do!) money-market accounts, and selling the money-market funds and transferring the proceeds back when we needed cash.

I'm going through the trouble because 1) money management is worth several hundred dollars a month, and more importantly 2) a big financial institution thinks I'm too lazy to do it and I'll show them that they're wrong (mostly)!

Historical fun fact: Merrill Lynch invented the Cash Management Account (CMA) a generation ago, which promised to pay customers money-market rates on cash balances. The CMA proved extraordinarily successful because no longer would retail customers like us have to actively manage their cash, savings, and brokerage accounts.

We've now come full circle and gone back to active management. Like air travel, phone service, fine dining, medical insurance, and a host of other products, in personal finance it's now an ala carte world.