What is cash sweeping?
Cash sweeping, or a sweep account, is a checking account that automatically transfers money to an investment account once that checking account exceeds a certain amount of money.
Here's what that would look like. Say you open a sweep account at your bank and set the sweep number at $2,000. Anytime your checking account exceeds $2,000, the bank would automatically transfer the amount over $2,000 into an account with a higher interest rate.
The huge bonus is that you earn more money and grow your investments without having to do anything. Rather than letting your excess cash idle in your accounts, you can be turning your money into more money by consistently investing with a sweep account.
Of course, investment accounts come with fees. People who opt into sweep accounts need to be aware that it's likely their investments will be charged fees. Some brokerages charge a flat fee, while others charge a percentage. It's critical to be aware of your fees before you make any investments.
However, sweep accounts aren't limited to banks. Robo advisors are starting to get in on it too.
How robo advisors are utilizing cash sweeping
Robo advisors have already drastically changed the landscape of investing. By lowering the barrier to entry (with some robo advisors such as Acorns you can start investing with as little as $5 ), they've enabled millions of people to get into the market who otherwise wouldn't have gotten in.
Now some of them are looking to revolutionize checking accounts by introducing cash sweeping.
Unifimoney for example, automatically builds clients' wealth by transferring cashback, deposit interest and purchase round-ups into a robo investing account, transferring a minimum of $25 each month. Although at the moment Unifimoney is only available to iOS users.
- Editorial Note: This offer is no longer available. Please visit the Unifimoney website for current terms.
Betterment, one of the biggest robo advisors in the game, introduced a “Two Way Sweep” option for its savings accounts in late 2018.
It's called Two Way Sweep because Betterment will sweep money both into and out of your checking accounts, depending on your needs. Betterment's system analyzes whether or not your checking account has enough cash to account for the next 21–35 days. You pick whether you want a 21- or 35-day cushion in your account. Betterment then calculates what that amount needs to be.
Betterment uses an algorithm for this ongoing analysis. If there's more money in your checking account than you need, the robo advisor sweeps it into low-risk exchange-traded funds (ETFs) in your savings account.
Plus, remember this works two ways. If your checking account gets too low, Betterment will automatically transfer money back into it. This helps ensure you'll always have cash on hand and could potentially be a barrier against going into debt.
The idea is that your money won't sit around in your checking account and lose the chance to earn interest for you. And since it's automated, after you set up this option, you get to be entirely hands-off.
More: Betterment review
What's the catch?
Fees. Fees are the biggest catch with sweep accounts.
There are high-interest savings accounts that earn the same or even more than some of these investment accounts. Ally Bank, for example, offers 2.2% interest on its savings accounts, and there are no minimum balance fees or monthly maintenance fees. Betterment charges a 0.25% management fee each year, so the more money you make, the higher your fees will be.
Sweeping money into an investment account will always benefit the investment broker. Since you're using their services, it's fair enough that you have to pay for it. But over time, fees can eat away at your earnings if you're not careful.
There's also volatility to consider. Anytime you invest, you run the risk of losing money. Money in a savings account usually doesn't disappear. You have to understand that with sweep accounts, your excess cash is going into the market.
Sweep accounts with robo advisors can be a great hands-off way to grow your investments. If you're someone who just doesn't have the interest or time to keep tabs on your checking account and manually move money, these accounts may be perfect. And if you're already investing with a robo advisor, this could be another way to maximize what you're getting out of it.
For Millennials, in particular, sweep accounts hold a lot of allure. A generation bogged down by student loan debt and saddled with stagnant wages means that it can be hard to find extra money to invest. It's also intimidating to invest when you're a total beginner. Sweep accounts take the burden of investing off Millennials' hands. Plus, they're a chance to continually invest rather than waiting to accumulate enough money in a savings account to transfer to an investment account in one bulk payment of say, $1,000.
All in all, sweep accounts can be a great way to grow your investments over time, as long as the fees make sense. Take the time to really familiarize yourself with how much you'll be paying in fees each year, and match that against your expected returns. The last thing you want is to lose money because you don't fully understand your fees.