LPL Financial’s cash sweep programs violated its fiduciary responsibilities to its advisory clients, according to an alleged client who filed suit in California federal court.
Daniel Peters filed the complaint in the Golden State’s Southern District, seeking class-action classification on behalf of other LPL customers.
Peters claims he’s an LPL customer and Michigan resident, holding “managed and simple accounts” in which LPL funneled cash into the DCA and ICA Programs—the cash sweep programs at the heart of the allegations.
According to Peters, LPL’s cash sweep program began as a “series of adjustments” to customers’ cash but, in recent years, “has transformed into an aggressive and unlawful effort” to boost LPL profits at the expense of customers. He said customers lose money on cash positions in managed customer accounts.
In the suit, Peters alleged that the dual cash sweep programs are set up to ensure LPL always receives most of the interest on the cash holdings, compared to the interest a client would get if the funds were placed in a typical money market fund or bank savings account.
The daily uninvested cash in customer accounts gets swept into several pre-selected bank accounts at institutions LPL chose. This cash generates interest each day, but that interest goes back to LPL and isn’t directly paid out to clients.
Instead, LPL allocates most of the interest for itself, while a small percentage goes to the customers (according to the lawsuit, LPL doesn’t disclose how much interest the firm allegedly withholds from customers). The percentage payable to LPL clients doesn’t change regardless of which banks LPL uses to invest the cash or whether interest rates differ.
LPL’s return on these assets indicates the “magnitude” of how beneficial the cash sweep program is for the firm, according to Peters. In 2024’s first quarter, the profit made from client cash custodied at the firm exceeded the total return on assets from advisory fees, commissions and interest income combined, the suit claims.
“In effect, (LPL’s) brokerage operation has effectively become a lawful conduit for its unlawful programs—costing the plaintiff and members of the class a substantial amount of money,” the suit states.
Additionally, Peters argued the management fee some clients pay LPL on their accounts also applies to the cash portion placed in sweep accounts, in addition to specific management fees LPL charges for those programs.
“Thus, the returns on most of those customers’ cash holdings are generally less than the expense of having that cash ‘managed’ by LPL—meaning that most of (LPL’s) customers see negative returns on their cash holdings because they are automatically included in (LPL’s) programs,” the suit claims.
Peters also alleges in the suit that LPL’s disclosure materials on the cash sweep programs were misleading. In its relationship summary, LPL states it always has to act in the client’s best interest when acting as a b/d or investment advisor. Regarding the cash sweep programs, LPL allegedly said the fees it gets were “typically” higher than the interest clients earn.
But Peters argued the firm is acting as an advisor in those cash sweep programs, as it’s making decisions about how and where to invest the excess cash and the terms on which it’ll be invested. Those decisions violate the fiduciary duty, as they always put LPL’s interests ahead of clients. According to the suit, the money LPL got was always—not “typically”—higher than what clients pocketed.
Peters’ attorney did not respond to a request for comment. Spokespeople for LPL did not return requests for comment prior to publication.
Earlier this week, Morgan Stanley unveiled in an earnings call that they were considering changes to their sweeps programs; Morgan Stanley Chief Financial Officer Sharon Yeshaya said the company intended to change its advisory sweep rates “against the backdrop of changing competitive dynamics.”
The changes come as some banks and firms face regulatory scrutiny over their cash sweep options. Last December, Wells Fargo revealed the Securities and Exchange Commission was looking into the cash sweep options the firm provides advisory clients, according to Reuters. Wells Fargo also announced this week that it was raising rates on its cash sweep accounts, according to Barron’s.
