FDIC Insured Deposit Sweep Program
Clients have several choices for how to invest cash balances. Money market mutual funds are one option and investors should be aware that these funds have similar characteristics, fees and costs as other the mutual fund products described in the Mutual Funds section above. BFE also offers an FDIC-insured bank deposit program, which sweeps cash held within accounts into an interest-bearing FDIC insured cash account or money market funds. In this program, BFE, Pershing and the Insured Deposit Program sponsor earn fees based on the amount of money invested in the program. Clients are entered into this program by default at the time of account opening but may withdraw from the program at any time by contacting their financial advisor.
Interest rates earned by clients in connection with the Insured Deposit Program at any given time will vary and are derived from then-current market yields paid by the participating banks. The interest rate earned by a given client is also a function of the linked value of all of the assets invested by a client in different accounts at Benjamin F. Edwards. In general, a client with greater linked balances will receive an interest rate at a higher tier than a client with lower linked balances. The aggregate value of a client’s linked balance will determine which interest rate tier in which a client is placed. In connection with the Insured Deposit Program, BFE will determine the amount of invested assets that is required for each interest rate tier, as well as the interest rate to be paid at each tier. Because BFE’s compensation is earned from the residue, the tiered compensation structure results in BFE receiving less compensation when more of a given client’s assets are invested with Benjamin F. Edwards.
Because BFE establishes the client’s final earned interest rate in the Insured Deposit Program and the threshold values of the Program’s linked account tiers, it directly influences the amount the client will earn and the revenue BFE retains. It is important for clients to understand this conflict so they can make informed decisions when evaluating the benefits of participating in the Insured Deposit Program versus other cash-sweep alternatives.
Fees and Costs
BFE, Pershing, and the program sponsor can earn higher fees when money is invested in the Insured Deposit Program than in other short-term cash alternative products. This means BFE has a conflict of interest because it has an incentive to recommend investment in this program over money market mutual funds, or in other short-term money- management products or products with the potential for higher returns.
The Insured Deposit Program sponsor establishes the parameters in which BFE participates in its program. Essentially, BFE earns its compensation by retaining any residual interest after the initial yield that was paid by the participating banks for the client deposits has been reduced by the fees payable to Pershing and to the program sponsor, and the rate paid to the client.
The fees paid to Pershing and the Insured Deposit Program sponsor are established at the outset. BFE is given the latitude to determine the final interest rate that will be earned by the client. Because BFE’s compensation is earned from the residue, it effectively determines its own compensation, within the limits of the initial market yields that are paid.
While BFE must pay a competitive rate to clients in order to retain their business, BFE has a conflict of interest in establishing that rate because the firm’s compensation will be greater if the client’s final yield is lower. BFE does not have this type of conflict in connection with money market funds and as a result, clients can earn more interest if they choose a money market fund over the Insured Deposit Program as their cash sweep vehicle. The revenue BFE derives from this program fluctuates due to the amount of cash invested and due to changes in market interest rates.