Add Wells Fargo to the list of firms being sued over the low returns offered on their "cash sweeps" policies.
A lawsuit filed on Tuesday in federal court in San Francisco on the behalf of a plaintiff named Keith Bujold accuses the wirehouse of failing to look out for its clients' best interests with its policy of "sweeping" their uninvested cash into bank accounts that offer far lower yields than easily available alternatives. The suit is being pressed by the same law firms bringing similar claims against LPL Financial in a separate case and comes amid related legal actions against Morgan Stanley, Merrill and Ameriprise.
Wells, which didn't immediately respond to a request for comment, acknowledged in November last year that the Securities and Exchange Commission was looking into its cash sweeps policies. And reporting its second-quarter earnings earlier this month, Wells said it was raising its yields on one of its sweeps accounts. That change, the firm said, is expected to lower its Wealth and Investment Management unit's revenue by $350 million this year.
The suit says that figure is almost an admission that something is wrong with Wells' sweeps policies, calling it "evidence of the massive windfall the programs provide to defendants at the expense of [Wells Fargo Advisors'] customers."
A lawyer for the plaintiff declined to comment.
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Cash sweeps: Checking the fine print on a conflict of interest
"Cash sweeps" refers to wealth managers' practice of taking uninvested cash sitting in clients' brokerage accounts and moving into affiliated and unaffiliated banks. Many of the current suits questioning sweeps policies contend that firms lend the money out at relatively high rates but only share a small fraction of the returns with clients. They also note that wealth managers could easily do better for investors simply by putting their money in high-yielding money markets and savings accounts, many of which are now paying around 5%.
The new suit against Wells, for instance, argues that the firm's main sweeps program moves uninvested cash into five affiliated and unaffiliated banks. Rather than trying to negotiate for higher returns on behalf of its clients, the suit argues, Wells merely accepts the rates offered by its directly affiliated partners and then directs unaffiliated banks to pay the same.
By doing so, according to the suit, "[Wells Fargo Advisors] breached its fiduciary duties to its customers as their agent, and also breached its contract with those customers that it would act as their agent, not for its own benefit. WFA's process created a clear conflict of interest that WFA fails to properly disclose or mitigate."
The lawsuit also contends that Wells began to revise its public statements about its sweeps policies after other firms started coming under scrutiny for their handling of clients' cash. In late 2023, for instance, Wells changed its disclosure about cash sweeps to say that the returns offered through the program "are typically lower" than yields from regular bank deposits.
The change was still misleading, according to the suit. The yields on sweeps accounts are "always" lower, it contends, not just "typically."
The suit also notes that Wells began saying in its disclosures in 2023 that clients could most likely make better returns by putting their cash into money markets and similar vehicles. The action accuses Wells of breach of fiduciary duty, gross negligence, negligent misrepresentation and omissions and violations of New York state laws banning deceptive acts and unlawful practices, among other things.
Although firms are coming under increasing scrutiny for their cash sweeps policies, some are showing little inclination to budge in response. Executives at LPL, Stifel, Ameriprise and Raymond James all expressed comfort with their firms' general sweeps policies in their recent second-quarter earnings calls.
Meanwhile, Morgan Stanley executives said in their firm's second-quarter call that they are raising yields on advisor-led sweeps accounts in response to "competitive dynamics." A Morgan Stanley spokesperson later confirmed reports that the firm was raising its returns to 2% for clients with $250,000 or more in certain sweeps accounts.
Defenders of sweeps generally argue that the accounts give investors a place to hold their cash for the short term while they decide if they want to put it into stocks, bonds or other investments. They note that sweeps can offer protection by the Federal Deposit Insurance Corp., which guarantees up to $250,000 on individual accounts.