SEC looking into JPMorgan advisory fees, Wells cash sweeps

Both JPMorgan's and Wells Fargo's advisory units have come under federal regulators' microscopes for issues ranging from advisory fees to cash sweeps, the megabanks disclosed this week.

JPMorgan, the largest bank in the U.S., said in a quarterly report that the Securities and Exchange Commission is looking into "aspects of certain advisory programs within J.P. Morgan Securities," a hybrid broker-dealer and investment advisor under the firm's wealth management arm. According to JPMorgan, regulators are giving particular scrutiny to its "aggregation of accounts for billing, discounting advisory fees, and selecting portfolio managers."

JPMorgan added in the disclosure that it's also responding to SEC questions about "the timing of the Firm's liquidation of shares distributed in-kind to certain investment vehicles that invest in third-party managed private funds."

"The Firm is cooperating with the SEC in regard to both inquiries," according to the quarterly filing.

A JPMorgan spokesperson declined to elaborate further on the regulatory filing. An SEC spokesman said the agency does not comment on "the existence or nonexistence of a possible investigation."

JPMorgan's disclosure came a day after its banking rival Wells Fargo revealed in its own quarterly filing that it's responding to SEC inquiries into its so-called cash-sweeps programs. The term "cash sweeps" refers to brokerages' practice of moving clients' uninvested money into internal and external banks, which pay interest in return for be being able to use the cash as deposits that they can then lend out at higher rates.

Broker-dealers justify sweeps by arguing that they provide clients with liquid assets held at banking institutions where they enjoy the guarantee of the Federal Deposit Insurance Corp. But there is a conflict. 

Skeptics often note that many clients would be getting a better return if their money were put in high-yielding money markets or certificates of deposit — even if those options aren't ultimately as lucrative to their brokerage firm. Tim Welsh, the CEO of the industry consulting firm Nexus Strategy, called cash sweeps Wall Street's "dirty little secret."

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Welsh said that after most brokerages were pressured by competition and industry trends to offer commission-free trading, they began to look elsewhere for revenue. One source they turned to, he said, was cash sweeps. 

Welsh said there's nothing necessarily wrong with brokerages helping to pay for commission-free trading with clients' uninvested money swept into bank accounts. He just wishes they were more upfront about the practice.

"'We are using your cash to subsidize our other banking and brokerage products at no cost or low cost,'" Welsh said. "They should just say that and be transparent about it."

Wells Fargo offers customers three different sweeps options. Its main program, the Expanded Bank Deposit Sweep, provides up to $1.25 million in FDIC insurance ($2.5 million for accounts) for money held at as many as five banks, including Wells Fargo Bank and other affiliates. 

The second option is called Standard Bank Deposit, which offers as much as $500,000 FDIC coverage (or $1 million for joint accounts) for money held at two or more banks. Generally, the more money that clients hold with Wells Fargo advisors, the more interest they'll receive. 

On Wednesday, the rates ranged from 0.15% for households with less than $1 million held at Wells to 1.3% for households with $20 million or more. By contrast, the Vanguard Federal Money Market Fund offers a yield of over 5% and requires investors to hold only $3,000 in it.

Wells' final option is itself a money market fund. But this fund, which was paying a 4.92% yield on Wednesday, is generally reserved for clients who aren't eligible for the bank sweeps, such as insurance and mutual fund companies and government agencies.

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Peter Crane, the president of Crane Data and the publisher of the Money Fund Intelligence newsletter, said regulators are no doubt giving a little extra scrutiny to cash sweeps because of the large difference between their rates and those offered by money markets and other high-yielding investments. His firm's Brokerage Sweeps Intelligence Index suggests sweeps accounts held at the largest brokerages are paying 0.62% on average to clients holding $100,000. Crane Data's 100 Money Fund Index meanwhile finds the 100 largest money markets are paying 5.19% on average. 

"Certainly that gap has never been wider," Crane said. "And that's drawing some intention on the regulatory front."

In the past, Crane said, firms have been able to stay on the right side of the law with their cash sweeps practices by making sure they disclose any conflicts of interest. If they've done that, then they can always say customers were told what they were getting into.

"And, of course, you're welcome to leave any time," Crane said. "It's not restricting you from taking the money and taking it elsewhere to a higher-yielding option. This is just taking advantage of smaller balances and really lazy customers who don't want to click to move the money."

Wells alerts investors on page 3 of an 9-page disclosure on its cash-sweeps options that there are likely better returns to be found elsewhere. The programs' rates, according to Wells, "will vary over time and are typically lower than rates available to clients making deposits directly with the Program Banks or at other banks, or available by investing directly in other money market mutual funds not offered through the Cash Sweep Program."

The disclosure goes on to state that Wells Fargo is under no obligation "to seek or negotiate interest rates" that are greater than what banks are willing to pay. 

Wells acknowledges that its advisory unit receives payments from the banks it sweeps investors' cash into. Once it deducts the interest it owes to clients from those payments, it keeps the rest for itself.

"Accordingly," states the disclosure, "Wells Fargo Advisors has an incentive to pay lower interest rates to participating accounts."

Wells further advises clients that if they want the "highest yields currently available in the market for your cash balances, please contact your investment professional … to discuss investment options that may be available outside of the Cash Sweep Program to help maximize your return potential consistent with your investment objectives, liquidity needs, and risk tolerance."

A Wells Fargo spokesperson declined to elaborate on the firm's latest regulatory disclosure. Responding last spring to a wide-ranging Financial Planning inquiry into the industry's cash-sweeps practices, a Wells representative said: "Our Cash Sweep Program allows clients to earn a return on cash balances by automatically 'sweeping' cash balances into a sweep vehicle until such balances are otherwise invested or used to satisfy obligations arising in the account. Cash Sweep Vehicle eligibility is based on the type of investment account and nature of account ownership."

The SEC has gone after other firms recently for alleged failures to properly disclose conflicts of interest in their sweeps practices. In September, for instance, it reached an $18.3 million settlement with the Concord, California-based investment technology and support firm AssetMark over charges that it hadn't been forthcoming about its handling of clients' uninvested cash. And in March 2022, Ameritas Advisory Services, a registered investment advisor in Lincoln, Nebraska, agreed to pay $4.6 million to settle SEC allegations it failed "to provide full and fair disclosure" of third-party payments such as revenue sharing and cash sweeps.