LPL Financial is facing a second lawsuit over its cash sweep program.
Douglas Nevitt, a 66-year-old Illinois construction retiree, has filed a suit in California federal court accusing the firm of violating its responsibilities to clients. He is seeking class-action classification in his suit.
According to Nevitt, who held an individual retirement advisory account with LPL from 2020 through 2022, the case is centered on “a simple ruse,” arguing that LPL had a mandate to act only in the “best interest” of clients (due to the SEC’s Reg BI rule and advisors’ fiduciary mandates) and to secure “reasonable interest rates” for clients’ cash balances.
“Instead, (LPL) implements a scheme whereby those clients’ cash balances are used by (LPL) to generate massive profits for themselves based primarily on prevailing market rates,” Nevitt argued.
The argument largely mirrors a class action request in a lawsuit filed last week by Dan Peters, an LPL client in Michigan. In his suit, Peters argued LPL’s cash sweep program morphed over the years “into an aggressive and unlawful effort” that always boosted LPL’s profits at customers’ expense. Peters argued the firm always structured its sweep programs to ensure it received most of the interest on the cash holdings.
LPL (like many other institutions) has a cash sweep program set up that will automatically transfer (or sweep) remaining cash balances in the client’s eligible cash (including proceeds of securities transactions, cash deposits and other money) into “interest-bearing deposit accounts.”
However, Nevitt argued LPL consistently failed to secure reasonable interest rates for clients and the rates offered by the firm were significantly lower than those of competitors.
In the complaint, Nevitt compared LPL’s interest rate on sweep programs to rates at Vanguard and InteractiveBrokers; for customers with a cash balance between $150,000 and $299,999, for example, LPL’s rates were 0.40%, compared to 4.6% at Vanguard and 4.83% at InteractiveBrokers.
While some firms operate money market funds (with comparatively higher rates of return on interest) as destinations for excess client cash, Nevitt argued in his complaint that LPL discontinued using them as “a cash sweep option” in April 2019.
But LPL hasn’t suffered, according to Nevitt; in the complaint, he argues that from March 2022 (when interest rates set by the Fed began rising) to now, the spread between what LPL paid to clients and what it made in the market grew 107%.
“Thus, LPL has a significant financial interest in (1) not paying its clients a reasonable interest rate and keeping as much of the ‘spread’ as it can, and simultaneously (2) not disclosing to its clients the unreasonable interest rates paid by the company (as well as the company’s inherent conflicts of interest), lest the clients pursue accounts with more lucrative rates at other institutions,” the complaint read.
LPL did not comment directly on the suit, though a spokesperson said, “our FDIC-insured cash sweep vehicles prioritize security, liquidity, and yield—in that order” and that it’s “designed primarily for short-term cash holdings.”
LPL isn’t the only company facing client lawsuits over its cash sweep programs. Late last month, Wells Fargo was a defendant in a lawsuit alleging the firms broke their duty to clients by structuring the sweep programs improperly (Ameriprise is also facing a similar complaint, according to Barron’s).
Keith Bujold is the New Mexico-based plaintiff in the Wells Fargo suit filed in California’s Northern District. He claimed to have been a Wells Fargo Advisors customer since 2014, having had cash swept into low-interest bank accounts when Wells Fargo’s investments returned far higher than what he was paid.
“While claiming to have designed, implemented and operated the Bank Sweep Programs as its customers’ agent, in reality, WFA used the Bank Sweep Programs to generate enormous fees for itself at the expense of its customers who receive only a minimal return on their cash deposits, while WFA keeps for itself the vast majority of interest and fees the Program Banks paid out on the cash deposited by WFA’s customers with those Banks,” the complaint read.
Bujold noted that Wells Fargo has pared back its cash sweep programs after disclosing in late 2023 that the SEC was investigating them. Last month, during its second-quarter earnings call, Wells Fargo revealed it would be changing the pricing of its cash sweep programs and boosting the interest rate for clients; it was estimated to cost Wells Fargo about $350 million per year, which Bujold said was “evidence of the massive windfall” the program was for the firm.
Wells Fargo declined to comment.
According to CEO Dan Arnold, LPL is continuing to remain firm on its cash sweep pricing. During the firm’s second-quarter earnings, Arnold said LPL had “no plans” to make changes, alluding to firms like Wells Fargo, Bank of America and Morgan Stanley, which all announced projected changes to pricing.
“As for the firms that have made changes, they have different business models and monetization frameworks than ours, so we can only speculate as to the issues they may be addressing,” Arnold said.