Brokerage firms also pay different interest rates on these idle

Brokerage firms also pay different interest rates on these idle cash balances depending upon the actual balance. They use language that requires a lawyer to interpret." This reminds me of the time that I was talking to a General Motors engineer about how much the jack cost in the trunk. Back then we didn't do nearly the amount of investment banking that is done by some of the majors such as Goldman, Merrill, and Lehman Brothers at the time. What the brokerage firm counts on is not getting that phone call.5% on the balance or less. Recently I saw rates on the order of 1. The $2 billion was up from $1.

The big boys who have over a $1,000,000 sitting in the account can easily negotiate a higher rate by simply picking up a telephone.Recently after all these decades it looks like the same technique applies today that applied back then. Years ago, China Led Panel Lights if you wanted to know how much money a brokerage firm made all you had to do was calculate interest earned versus interest expense, and you basically had the bottom line, give or take a bit on a pretax basis.Forget about reading the small print in your agreements with the investment companies.The master of this game is Charles Schwab, the discount brokerage house. The whole issue is the concept of IDLE CASH, and what is being done with it.

When I was s Senior Accountant with Arthur Andersen in the early 1970's, this calculation was always appropriate, and we dominated banking and finance type companies at that time. Merrill apparently took it from them. His year end bonus is completely dependent upon how much he sweeps, and how little he has to pay you for your own money. I said you got to be kidding, are you telling me that my life is dependent upon a 50 cent jack when I get a flat tire in the middle of a winter night. Balances below a $100,000 usually get the lowest rate which is probably about 1.What happens is that at the end of the day, the firm checks to see what idle cash is available in your account.

" As I walked away, he yelled, "Do you want to know why we only pay 50 cents for that jack. Meanwhile the firm acting like a bank will reinvest your cash over night in its own firm account at a much higher rate.Since most people with brokerage accounts are always transacting business by buying and selling securities, they are not consciously aware of their idle cash balances all the time." I said sure, why? He said, "Because we can't get one for a quarter.25% at the moment. When Merrill was quizzed about the practice, they came back and said that the brokers at the firm are encouraged by the firm to discuss "higher-interest options" in order to "meet specific client demands".

Once a year, we would have a partner's meeting, and I would attend as a matter of course. Most individuals and institutions are still not making the interest they should be making, on the funds they have deposited with brokerage firms. It's a strange term when you consider that we were never licensed as a bank by the appropriate federal agencies. They were using this technique years before anyone else. This mean's the firm is getting better at sweeping the balances, and they are sweeping bigger balances. Back in the late 70's, Merrill Lynch led the industry with the development of what they called the CMA account which stood for Cash Management Account.

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