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 behalf of Keith Bujold, a New Mexico resident, accuses the wirehouse of failing to prioritize its clients' best interests by "sweeping" their uninvested cash into bank accounts that yield far lower returns than readily available alternatives. The suit, pursued by the same law firms bringing similar claims against LPL Financial, joins ongoing legal actions against Morgan Stanley, Merrill, and Ameriprise.
Wells acknowledged last November that the Securities and Exchange Commission was investigating its cash sweeps policies. Reporting its second-quarter earnings earlier this month, Wells announced an increase in yields on one of its sweeps accounts, a change expected to reduce its Wealth and Investment Management unit's revenue by $350 million this year.
The suit argues that the $350 million figure is nearly an admission of wrongdoing, citing it as "evidence of the massive windfall the programs provide to defendants at the expense of [Wells Fargo Advisors'] customers."
Both the plaintiff's lawyer and Wells Fargo declined to comment.
Sweeping up
"Cash sweeps" refer to the practice of wealth managers moving uninvested cash in clients' brokerage accounts into affiliated and unaffiliated banks. Many current suits argue that firms lend out this money at high rates but only share a small fraction of the returns with clients. They also contend that wealth managers could easily secure better returns for investors by using high-yield money markets and savings accounts, many of which now offer around 5%.
Robert Finkel, a senior partner at New York-based Wolf Popper representing clients in similar cases against Merrill and Morgan Stanley, said the recent surge in litigation likely stems from firms offering low sweeps returns for too long.
"The rates have stayed so low compared with market rates, which tend to be high," Finkel said. "The delta between the two just suggests something inappropriate with how low the sweep rates have stayed."
Unlike recent cases accusing wealth managers of not fulfilling their fiduciary duty to prioritize clients' interests, Finkel's suits against Merrill and Morgan Stanley accuse the firms of failing to secure "reasonable" returns on money held in retirement accounts. Finkel did not provide an estimate for when these cases might be resolved.
Rob Herskovits, founder of the New York-based law firm Herskovits, likened the sweeps suits to past regulatory scrutiny of firms' handling of mutual fund investments. Several major firms settled for millions over allegations of steering clients into funds that paid higher fees instead of cheaper alternatives.
"It wouldn't surprise me if the firms bringing these sweeps lawsuits drew inspiration from those earlier cases," Herskovits said.
Herskovits noted that the new suit against Wells heavily relies on the firm's supposed fiduciary obligation in handling clients' cash. However, he questioned whether such a duty applies to cash held in brokerage accounts.
Peter Crane, president of the money-market tracker Crane Data and publisher of the Money Fund Intelligence newsletter, expressed little sympathy for arguments that firms must help clients secure high returns on accounts they control directly. Self-directed brokerage accounts, he noted, allow investors to move money easily on their own.
"It's not like they hold you hostage," Crane said. "The nature of cash is you're welcome to leave at any time."
Wells' sweeps program
The new suit against Wells alleges that the firm's main sweeps program moves uninvested cash into five affiliated and unaffiliated banks. Instead of negotiating higher returns for clients, the suit argues, Wells accepts the rates offered by its directly affiliated partners and directs unaffiliated banks to match those rates.
In doing so, the suit claims, "[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 asserts that Wells revised its public statements about its sweeps policies after other firms came under scrutiny for their handling of clients' cash. In late 2023, for instance, Wells altered its disclosure to state that returns through the sweeps program "are typically lower" than regular bank deposits.
The change, according to the suit, remains misleading. The yields on sweeps accounts are "always" lower, it contends, not just "typically."
The suit also highlights that Wells began acknowledging in its disclosures in 2023 that clients could likely achieve better returns by investing their cash in money markets and similar vehicles. It 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 charges.
Holding steady
Despite increasing scrutiny over their cash sweeps policies, some firms show little inclination to change. Executives at LPL, Stifel, Ameriprise, and Raymond James all expressed confidence in their firms' sweeps policies during their recent second-quarter earnings calls.
Morgan Stanley executives, however, announced during 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 that the firm was increasing returns to 2% for clients with $250,000 or more in certain sweeps accounts.
Defenders of sweeps argue that these accounts offer investors a place to hold their cash short-term while deciding on other investments. They also point out that sweep accounts provide protection from the Federal Deposit Insurance Corp., which guarantees up to $250,000 on individual accounts.
In response to the suit questioning Ameriprise's sweeps policies, a firm spokesperson stated, "Our cash sweep is intended for money in motion, not as an investment option for significant cash balances over extended periods. Our programs comply with legal and regulatory requirements."
