Why are you paying an investment manager to hold cash?
Your advisor charges a percentage of your account. Look at what “your account” includes. The money market, the sweep balance, the cash waiting to be sent to you — it’s usually all in there, billed at the same rate as everything else.
Consumer education, not investment advice. Paul Powell is not currently a licensed financial advisor.
In most advisory accounts, cash is billed exactly like stocks and bonds: the same percentage, every quarter. The SEC itself says advisory clients “often pay advisory fees” on the cash in their sweep accounts. And the firm that charges you to hold that cash can earn a second time on it, from the spread the sweep pays. When the fee is bigger than the interest, the return on your cash is negative, and the paperwork says so in plain words.
The fee doesn’t care what the money is doing
An asset-based fee is simple on purpose. Take the value of the account, multiply by the rate, bill it. It doesn’t ask what the money is invested in. That simplicity is sold as a feature, and mostly it is one. Until you notice what it does to the one part of your account that isn’t invested at all.
Here’s how one large bank’s advisory program puts it in its own brochure, dated March 2025: “Cash and cash equivalents, including money market funds, are subject to the Advisory Fee.” Then it goes a step further: “Cash raised for withdrawal will be charged both an Advisory Fee and an applicable Model Manager or Portfolio Manager Fee until the cash is removed from the Account.”
Read that one again. Money you’ve asked to take out, sitting there waiting to leave, is still billed by two managers.
That brochure isn’t unusual. It’s just unusually clear. Similar language runs through the program brochures of many large firms, because billing on the whole account, cash included, is the default way asset-based fees work. The SEC said as much when it announced three settled cash-sweep cases in January 2025: “Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts.”
Now add the second layer. Uninvested cash in a brokerage or advisory account is usually “swept” somewhere by default, often into a deposit account at a bank affiliated with the firm. The bank pays you one rate and earns a higher one on the money. The spread is revenue. In those same January 2025 cases, the SEC said the gap between the bank deposit sweep and the alternatives “at times grew to almost 4 percent” while rates were rising. The firms paid $60 million in combined penalties without admitting or denying the findings. Smaller firms get paid on sweep cash too. In 2022 the SEC settled with a Massachusetts adviser whose affiliated broker-dealer received revenue-sharing payments from its clearing firm based on clients’ cash sweep holdings, which the adviser hadn’t disclosed.
So look at a dollar of your cash. The advisor bills a percentage on it. The sweep pays you less than the market rate on it, and the difference goes somewhere else. That’s two fees on the one part of your portfolio that is supposed to be doing nothing.
How much it costs depends on how much cash you hold and what it earns. Here’s an illustration, not a quote: a $1,000,000 account billed at 1% with 5% in cash pays $500 a year just to hold that $50,000. If the sweep pays less than 1%, the cash is losing money after fees before anyone has made a single decision. And the brochure already told you it could. The same bank document says that because the fee is charged on everything, “including cash and cash alternatives,” in a low-rate environment “the net investment return on cash and cash alternatives, including the Deposit Account, will be negative.”
Will be. Not may be.
Completely. That’s the point.
Billing on cash is legal when it’s disclosed, and it is disclosed, in the fee section of the brochure and the advisory agreement. Earning a spread on sweep cash is a normal part of how brokerages and banks make money. The enforcement cases weren’t about whether the practice exists. They were about disclosure and about whether firms considered their clients’ interests when they picked the sweep. And there are honest reasons to hold cash in a managed account: money you’ll spend soon, a defensive allocation, dry powder. The question isn’t whether cash belongs in your portfolio. It’s what you’re paying for it to sit there.
The advisor who decides how much cash you hold is paid the same on cash as on everything else, and the firm may be paid extra on the cash itself. Most conflicts on this site push an advisor toward a product. This one is quieter. It takes away any reason to put the cash to work, and at some firms it adds a reason to leave it where it is. Nobody has to act in bad faith for that to cost you. The fee schedule just never asks whether the cash earns its keep, so you have to.
Find three numbers: the cash, the rate, and the fee on it
This takes ten minutes and your own paperwork. Open your latest statement and find the cash line: sweep, deposit account, money market. If you’re not sure where it sits, the annotated statement teardown shows where each cost hides. Write down the dollar amount and the rate it’s earning. Then open the fee section of your advisory agreement or Form ADV brochure and look for the words “cash” and “cash equivalents.” You’re checking whether cash is billed and whether any fee on it is excluded, reduced, or capped.
Then do the arithmetic. Your advisory rate minus the sweep rate is the net return on your cash. If that number is negative, it deserves a conversation. Some advisors will exclude cash from billing, lower the fee on large cash balances, or move the cash to a higher-yielding money market fund if you ask. Others won’t. Either answer tells you something. Fees are negotiable, and this is one of the easiest parts to negotiate because the arithmetic is sitting on your statement.
If you’re vetting a new advisor, put it in writing before you sign. It sits naturally next to the twelve written due-diligence questions, and the whole sequence is laid out in the Method.
“Is the cash in my account, including sweep balances, money market funds, and cash held for withdrawal, included in the value you bill your advisory fee on? What rate does my cash earn today, where is it held, and does your firm or any affiliate earn revenue on it? Would you exclude cash from the fee, or cap the fee on it, when it exceeds a set percentage of my account?”
You hired someone to invest your money. How much are you paying them for the part they didn’t?
Already have an advisor? Run the same six steps on them.
The Evidence-Based Hiring Method — six steps, the minimum criteria, and all twelve written questions with the answer guide. Built for hiring an advisor. It works just as well to audit the one you already have.
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