NEW YORK (AFX) - Citigroup Inc.'s stock-brokerage unit, Smith Barney, plans to lower the interest rate it pays to clients in its bank sweep accounts who keep less than $1 million at the firm.
In doing so, Smith Barney is catching up with many Wall Street competitors that have been jiggering their broker commission schedules and their services to attract assets from affluent investors and discourage activity from those less wealthy.
Smith Barney currently gives the same interest rate on excess cash in brokerage accounts to all customers who agree to have it swept into deposit accounts at Citigroup-owned banks instead of into traditional money-market funds. Beginning Sept. 1, however, Smith Barney will tier rates into four asset-based categories, according to a June 6 internal memo.
Another probable change in the program is likely to affect even the wealthiest investors. The largest U.S. banking company 'is likely' to make organizational changes in its banking structure that will reduce the 10 Citigroup-owned banks in the program to three, according to the memo, whose accuracy was confirmed by a bank spokesman.
Savvy investors spread their cash balances among several banks to maximize the benefit of the $100,000 government deposit insurance for each account. After Citigroup's bank consolidation, the maximum amount of Federal Deposit Insurance Corp. available for a sweep account would fall to $300,000 from $1 million.
The memo reassured brokers, nervous about giving news of lower rates to their clients, that the tiered rates will generally be equal to, or better than, those of major competitors.
The wealthiest tier of clients with $1 million or more of assets at Smith Barney won't see any changes because they will continue to be paid at a rate tied to the firm's Smith Barney Cash Portfolio Money Market Fund. As of May 22, that rate was 4.45 percent, according to the memo. The remaining tiers -- $500,000 to $999,999, $250,000 to $499,999 and less than $250,000 -- will get lower rates based on prevailing economic metrics.
It estimated those rates as of May 22 as 3.6 percent, 3.2 percent and 1.63 percent for the tiers below $1 million.
'I'm sure it's going to be a wake-up call to some people,' said Connie Bugbee, managing editor of iMoneyNet, a Westborough, Mass., research firm that traces money-market funds. 'With the 17 rate hikes by the Federal Reserve, 1.63 percent is pretty minuscule.'
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