My response to Wells Fargo brokerage cash sweep change
Wells Fargo brokerage is changing the cash sweep option on July 30, 2007. The new option will generally reduce the returns earned by clients on cash balances kept at the brokerage.
I have two accounts at Wells Fargo brokerage: a taxable account and an IRA account. The following is what I will / intend to do.
For the taxable account, I will pull out all cash balances in the account and keep the money in either my GMAC Bank account or in Fidelity’s FSPXX, California AMT tax-free money market fund. Since I have setup a margin account at Wells Fargo, I can still buy any stock or ETF whenever I want to (using the equity already in the account), and then transfer the money in using ACH to pay for the trade on the settlement date. Conversely, if I sell an investment, I will transfer the money out on the settlement date. In this way, I avoid having any money sitting in the new crappy cash sweep option.
In the IRA, this external money linkage is generally not possible but I still do have the option of contributing to the IRA only when I am ready to invest and not contribute earlier and then let the money sit in the new cash option. For cash already in the IRA (I currently have about $1k cash sitting uninvested), I can think of the following options:
- Invest in a position traded money market fund (as suggested by Wells Fargo). Drawbacks are a) the sweep is not automatic, b) there could be minimum investment limits, and c) this could possibly use up one free trade per transaction.
- Invest in a short-term bond ETF like BIL or SHY. Drawbacks are a) the sweep is not automatic, b) there are transaction costs (associated with bid/ask spread), c) this uses up one free trade per transaction, d) dividends are not automatically re-invested, and e) small NAV fluctuations.
- Invest in a mutual fund equivalent ETF. In my portfolio, I invest in VGSIX (VG REIT index fund). For any uninvested cash in the Wells Fargo brokerage account, I will swap VNQ (VG REIT index ETF) for VGSIX, i.e. sell VGSIX in my Vanguard account and purchase the equivalent amount of VNQ in the Wells Fargo brokerage account. By doing this, the money freed up at Vanguard can be put into Vanguard’s money market fund.
My preference at this point is to using option 1 but I do need to check out the minimum investment amount, transaction costs if any and whether each transaction uses up one of the free trades. If this is not favorable, I will probably pick option 3.
Update
I did some additional research on using option 1 for the IRA account. I used the following MMF screener settings from the Wells Fargo brokerage website:
The screener returns four funds:
It looks like the best bets are PMTXX (ER 0.75%) or WFGXX (ER 0.64%). I have to rule out Vanguard’s Prime Money Market fund because the minimum investment is $3000 and it is not a NTF fund.
According to the prospectus, WFGXX typically settles on the next business day. Also it doesn’t appear to have any low balance fee after the position is open, i.e. you can drop below $1000. The minimum subsequent transaction amount is $100.
Stumble it!
April 21st, 2008 at 12:24 am
I was told by a customer rep that I could purchase no-load money market funds without fee even if they weren’t designated NTF.
Of note, I haven’t actually tried recently so cannot verify although in the past I’d been able to purchase Vanguard’s VMMXX and VMSXX without fee.
Also, for some reason, Wells Fargo will no longer let you buy VMSXX (the tax-free equivalent) from the order entry screen but still permits you to buy VMMXX.
-Buddy
April 21st, 2008 at 8:22 am
Buddy Hall, thanks for your comments.
When did you have the conversation with the customer rep? What the rep said used to be true but there was a change right around Jan/Feb 2008. when Wellstrade. See this post:
RMMXX no longer NTF at WellsTrade.