The Mistake Nearly Everyone Is Making With Their Cash

To identify these risks, it’s first helpful to understand how these sweep programs work. Essentially, an originating institution — could be a bank, brokerage firm, or fintech company — tells you they can provide increased FDIC insurance by spreading (selling) your cash across their network of other banks. That may sound OK on paper, but the reality is that your cash gets swept up into omnibus accounts held in the bank’s name, not in the client’s name.

This means that if the originating institution were to fail, your clients would lose access to all their funds until the resolution process is complete. In the case of a bank, that may happen in a matter of days, but if a fintech has custody of a client’s funds and they fail, clients may be stuck waiting through a bankruptcy process. Just ask anyone who thought their funds were safe at FTX.

If a client needed that cash to buy equities when the market dips, too bad. And if they needed the money to make a tax payment or close on the purchase of a house, they may be out of luck, with dire consequences. Clients can’t contact the underlying banks that hold their funds, since they have no relationship with them.

Furthermore, they don’t know to whom their deposits were sold, and if they happened to be placed with a bank where clients already hold other deposits, they may overlap and exceed the FDIC limits. This means that clients might not be fully insured, even when you thought they were.

These risks are avoidable. In fact, the main beneficiary of clients taking on these risks is the very institution that is brokering their deposits, since in the process of selling deposits out to other banks, they keep a spread for themselves, passing along a net rate to the customer while hiding the embedded fee or spread that they’re keeping. In short, there’s a conflict of interest that leaves the depositor with less yield and more risk than had they just opened more bank accounts directly in their own name.