What is a Sweep Account?
A sweep account is a brokerage or bank account that, at the close of each business day, automatically transfers funds that surpass or fall short of a certain threshold into a higher interest-earning investment option. The excess cash is usually swept into a money market fund.
Breaking It Down
Using a sweeping tool, such as a sweep fund works by supplying the company with the highest amount of interest and the least amount of personal interference by moving money into a high-interest account at the end of the day. In a sweeping system, a bank's machines evaluate the use of checkable deposits by customers and sweep funds into deposit accounts on the money market.
Some brokerage accounts had similar features as of 2016 that allowed investors to gain some extra return on the unused cash. A sweep account is a simple mechanism that allows any money in a checking account above or below a specified threshold to be poured into a better investment vehicle. Historically, sweep accounts were required because federal banking regulations prevented interest in checking accounts.
A sweep account, whether for business or personal use, offers a way to ensure that cash is not sitting idly in a low-interest account while better liquid cash investment instruments may receive higher interest rates. These investment instruments that provide higher interest rates, while also providing liquidity, include mutual money market funds, high-risk investment or savings accounts, and even short-term certificates with maturities of 30-, 60- or 90-day for established investment layovers.
Individuals and businesses need to keep an eye on the expense of sweep accounts because the gain of higher returns from investment funds outside the checking account can be balanced by the fees paid for the account. Some brokerages or banks are paying flat fees, while others are offering a percentage of yield.
