Question about purchasing Broker CDs at Schwab

[dmpi]

We are only talking a few bucks a day here which can be considered 'noise' for many of you but I'm just trying to figure this out. When you buy a Broker CD at Schwab the first settlement date might be a week or two in the future. I have my money sitting comfortably in SWVXX earning 4.2%. What is the correct timing of selling out SWVXX in order to fund my broker CD? I've read that SWVXX can settle in one day. Am I going to lose a week or two of interest while I wait for the CD to reach settlement date? Or is there some trick where I can pay up just before the settlement date?

 

[njhowie]

Assuming Schwab works the same way as Fidelity, your money will not be taken until the trade date for the new issue CD - which is the date the new CD is issued, not the date you submit the order. So, you would not lose any interest. The money would come out of your cash settlement account/fund on the day the CD(s) are put in to your account.

If you have to sell to put cash somewhere that Schwab will take it from, you should be fine doing it the day before issue date. Since SWVXX is a money market fund, Schwab may simply pull the funds from there automatically without you manually submitting a sell order. I would call just to confirm.

 

[audreyh1]

Yeah a big question is whether Schwab pulls from any MM fund like Fidelity does when the core is depleted. I was given the impression a while back that they do not. Please update.

 

[pb4uski]

Yeah a big question is whether Schwab pulls from any MM fund like Fidelity does when the core is depleted. I was given the impression a while back that they do not. Please update.

That is my understanding... they do not and you have to do it. I'm with Schwab and keep my funds in SWVXX... settlement fund has a negligible balance.

I can still buy bonds even though my settlement fund is negligible. If it is a secondary issue that will settle tomorrow I just sell the same amount of SWVXX to cover the purchase. OTOH, if it is a new issue and doesn't settle for a week or two, I set a reminder on my phone to sell $x in SWXX on a specified date, usually the day before settlement, so I don't have $x sitting in the settlement fund for a week or two at 0.4% settlement yield vs 4.5% SWVXX yield.

It is a minor PITA, but workable for me but does get a bit confusing when I have multiple new issues purchased but not settled. I do wish that I could set SWVXX as my settlement fund at Schwab like I can at Fido so I would not have to be bothered with this stuff.

 

[dmpi]

Yeah a big question is whether Schwab pulls from any MM fund like Fidelity does when the core is depleted. I was given the impression a while back that they do not. Please update.

I sent my Schwab adviser an e-mail asking the question. I'm afraid the answer will be they only pull out of their lowly 0.45% sweep account. But we'll find out.

 

[OldShooter]

Rather than an SGOTI poll, I suggest that you just call the Schwab bond desk. I don't do a lot of bonds but I have found them to be very helpful. They are not paid commissions AFIK and when I brokerchecked the guy I was talking to IIRC he had 17 years of industry experience. I am not sure the pone number is published but your rep should be able to give it to you. You can also PM me if you like.

 

[pb4uski]

Rather than an SGOTI poll, I suggest that you just call the Schwab bond desk. I don't do a lot of bonds but I have found them to be very helpful. They are not paid commissions AFIK and when I brokerchecked the guy I was talking to IIRC he had 17 years of industry experience. I am not sure the pone number is published but your rep should be able to give it to you. You can also PM me if you like.

OP, by all means take OldShooter's advice and call them and don't waste your time listening to other Schwab customers who have current, first hand knowedge of how Schwab operates.

 

[dmpi]

That is my understanding... they do not and you have to do it. I'm with Schwab and keep my funds in SWVXX... settlement fund has a negligible balance.

I can still buy bonds even though my settlement fund is negligible. If it is a secondary issue that will settle tomorrow I just sell the same amount of SWVXX to cover the purchase. OTOH, if it is a new issue and doesn't settle for a week or two, I set a reminder on my phone to sell $x in SWXX on a specified date, usually the day before settlement, so I don't have $x sitting in the settlement fund for a week or two at 0.4% settlement yield vs 4.5% SWVXX yield.

It is a minor PITA, but workable for me but does get a bit confusing when I have multiple new issues purchased but not settled. I do wish that I could set SWVXX as my settlement fund at Schwab like I can at Fido so I would not have to be bothered with this stuff.

When you purchase a new issue bond that will settle days into the future does it actually let you put in the order? I tried to buy a CD that will settle in a week but it wouldn't take in the order and it said I had insufficient funds. I'm even in a margin account but it said CDs are not margin-able. There might be a difference between bonds and CDs. Anyway thank for the info. I'm so many fine nuisances about brokerages that you never think about. I though they were all the same.

 

[pb4uski]

^^^ Not sure on CDs but I did it for some bonds not long agovand have done it a number of times over the past couple months. As I write this my Schwab settlement account has a negative $50k balance from a purchase that will settle Monday.... I have an order in to sell $50k of SWVXX to cover the settlement.

 

[Gotadimple]

Don't confuse bonds with CDs. The Schwab Bond Desk can answer questions about both.

SWVXX is a money market mutual fund, and as others have said, Schwab will not liquidate anything in a fund to cover a purchase. Because the Sweep feature has been eliminated for retail accounts for several years: Except for certain types of accounts that have fees associated with them.

From the Cash Features Disclosure Statement:
"Generally, only Managed Accounts,7 some benefit plan accounts, and other retirement accounts are eligible for the Money Fund Sweep Feature.
. . .

The Money Fund Sweep Feature automatically invests in and redeems shares of a
Schwab Sweep Money Fund you select from those made available to you. You can find
out which Schwab Sweep Money Funds are available by checking your Account Application or by contacting us . . .

7The term “Managed Accounts” means (1) Accounts enrolled in Schwab-sponsored discretionary and non-discretionary wrap fee programs, which include, but are not limited to, the Schwab Managed Portfolios™, Managed Account Connection®, Managed Account Select®, and Schwab Wealth Advisory™ services; . . ."

 

[COcheesehead]

When you purchase a new issue bond that will settle days into the future does it actually let you put in the order? I tried to buy a CD that will settle in a week but it wouldn't take in the order and it said I had insufficient funds. I'm even in a margin account but it said CDs are not margin-able. There might be a difference between bonds and CDs. Anyway thank for the info. I'm so many fine nuisances about brokerages that you never think about. I though they were all the same.

I’ve had it happen both ways at Fidelity and I can’t tell you why. Most often I can buy a bond or CD and they will pull from my settlement account first and if that is not enough they pull from my money market FZDXX. I did, however have a time where the funds would have had to come 100% from the money market and I got a notice saying I needed 100% of the purchase cost in my core account. No idea why.

 

[wolf]

OP. Good question. Just joined Schwab, 2 months ago. Had same questions.
Couple of poster, who are Schwab clients, are correct.

I also have Vanguard account. Their money market fund is also my "settlement
account."
Schwab. SWVXX, money market, is not a "settlement account". Have to sell day
before and put in "Bank", low interest account.
Once you get use to it, not to bad....still a pain, would be nice if FIDO, Vanguard, and
Schwab had the same procedures.

 

[OldShooter]

... Schwab. SWVXX, money market, is not a "settlement account". Have to sell day before and put in "Bank", low interest account. Once you get use to it, not to bad....still a pain, would be nice if FIDO, Vanguard, and Schwab had the same procedures.

I think Schwab came up with that zero interest "FDIC" insured story as part of their revenue improvement following the zero commission decision. I've actually been expecting that FIDO would copy the idea but apparently they have decided to keep a MM sweep. As you say, it's a pain but we are not traders so we don't run into it very often.

 

[dmpi]

An Update. I got in touch with my Schwab adviser and he said: You will start earning interest on the day you purchase the CD, not when the trade settles. So, you can sell value Advantage and purchase a CD same day and start accumulating interest on the CD straight away.


I'm a bit surprised as to that answer but I guess I don't fully understand how Schwab handles their broker CDs. I thought they accumulated orders until they have enough orders and then they fire the thing off on the first settlement day. Anyway I'll accept his response at face value and not worry about this.

 

[audreyh1]

Huh? Doesn’t seem quite right.

You would start earning interest on the CD the day that it’s issued. Is that the same day it settles?

Big clue would be the maturity date. That indicates when the clock starts ticking, IMO, along with earning interest.

 

[dmpi]

Huh? Doesn’t seem quite right.

You would start earning interest on the CD the day that it’s issued. Is that the same day it settles?

Big clue would be the maturity date. That indicates when the clock starts ticking, IMO, along with earning interest.

I think you're right. I did a calculation with one of the CDs I already bought and I think I got interest starting the day after the settlement day. In retrospect that the answer I would have expected. I'll just have to learn to live with this.

 

[wolf]

Huh? Doesn’t seem quite right.

You would start earning interest on the CD the day that it’s issued. Is that the same day it settles?

Big clue would be the maturity date. That indicates when the clock starts ticking, IMO, along with earning interest.

Agree. Does not seem right.

 

[pb4uski]

I think you're right. I did a calculation with one of the CDs I already bought and I think I got interest starting the day after the settlement day. In retrospect that the answer I would have expected. I'll just have to learn to live with this.

Live with what?

 

[dmpi]

Live with what?

Just live with the fact that I'm going to lose some interest after I sell out my SWVXX and before my first settlement date.

 

[Gotadimple]

Just live with the fact that I'm going to lose some interest after I sell out my SWVXX and before my first settlement date.

But it's really not all that much. And it is the cost of doing business. You would have lost a similar amount if you had an account outside Schwab and had to ACH transfer in from the outside bank with a high yield to your settlement account.

The ideal would be a settlement account that pays money market rates, but you can only get that at Schwab if you have assets under management.

- Rita

 

[dmpi]

But it's really not all that much. And it is the cost of doing business. You would have lost a similar amount if you had an account outside Schwab and had to ACH transfer in from the outside bank with a high yield to your settlement account.

The ideal would be a settlement account that pays money market rates, but you can only get that at Schwab if you have assets under management.

- Rita

We're only talking a couple of bucks per day but this kind of thing encourages me to go long on the CD, so I'm not constantly buying them. Also I will look for CDs that have a closer settlement date.

 

[audreyh1]

Just live with the fact that I'm going to lose some interest after I sell out my SWVXX and before my first settlement date.

1 day?

 

[dmpi]

1 day?

Isn't one day to settle SWVXX so I have cash and then I order my CD which can take a week to reach first settlement day... and only then I get interest from the CD.

 

[pb4uski]

Just live with the fact that I'm going to lose some interest after I sell out my SWVXX and before my first settlement date.

You don't have to. You can have a negative settlement account balance, I've done it here and there with bonds where I buy a new issue today and it doesn't settle for a week or two.

So for example, let's say I have $100k in settlement and buy $100k of new issue bonds that don't settle for 12 days. At that point, my settlemnt account shows as $100k beginning balance less $100k purchase for the bonds. I can call my broker and he can buy $100k of SWVXX even though my settlement account is $0. After that purchase I have $100k of SWVXX and my settlement account shows a balance of MINUS $100k, so they net to $0.

I just need to remember to sell $100k of SWVXX the day before the bond purchase settles. I usually set up a reminder on my calendar.

I've done if numerous times for bonds. Never for CDs but I would think you could do it for CDs too.

That way for that 12 days the $100k is earning the SWVXX yield rather than 0.4% of $0. Only about $150 but still an easy $150... just need to call my broker and do an online transaction later... 15 minutes work.

 

[MarieIG]

TD Ameritrade (merging with Schwab) makes you hold money in their stinkin sweep account for limit orders on stock. That's one benefit of Vanguard which currently pays decent interest on their sweep account.

With regard to bonds, I haven't place an order before the money cleared, but if they like Vanguard, as long as the money shows up before the settlement date, the order goes through. (I just did that last week at Vanguard and had a negative balance in my settlement account for a bit.)