Stocks and bonds both fell sharply last year. But one bright spot in financial markets was the rising interest rates on money-market funds, which in December topped 4% on average for the first time in 15 years.

Money-fund rates have stayed high so far this year, now averaging 4.18%, according to Crane Data LLC. That’s a big increase from just a few months ago, and investors who aren’t aware of the climb in rates—or who don’t act on it—could be missing out on an opportunity for much higher returns than they’re getting now on the cash in their brokerage accounts.

To see why, you have to understand so-called bank cash-sweep vehicles, which most big Wall Street brokerage firms use to handle the cash that comes into investors’ accounts. Firms that use these programs sweep the proceeds of investors’ securities sales and interest and dividend payments into a bank-deposit vehicle that typically pays a fraction of what investors could earn on a money-market fund. The money stays there until it is reinvested by investors or their brokers or advisers, if it ever is. Money that investors withdraw from their account also passes through the bank vehicle.

For example,

Morgan Stanley’s

MS 0.22%

cash-sweep program pays 0.01% annually for most uninvested cash amounts under $500,000. The rate inches up to 0.15% for amounts of $1 million or more, topping out at 0.5% for cash of $5 million and above.

The starting rates are also 0.01% at the Merrill unit of

Bank of America Corp.

BAC 0.83%

and the J.P. Morgan Advisors unit of

JPMorgan Chase

JPM 1.55%

& Co. At discount brokerage firm

Charles Schwab Corp.

SCHW 3.13%

, the rate is 0.45% for all cash sweep amounts.

At these and other firms, cash generated by an investor’s account is automatically swept into the bank vehicles in most cases. Investors or their brokers or advisers are then free to move the cash out of those vehicles into higher-yielding assets. Meantime, brokerages are allowed to deploy such assets in the same way that banks use savings deposits, investing them for a higher rate of return than they pay out to clients.

Bank sweep rates at Morgan Stanley, the largest retail brokerage firm, based on value of eligible deposit balances*

Balance

$5,000,000 and above

$2,000,000 —$4,999,999

$1,000,000 — $1,999,999

$500,000 —$999,999

$0 — $499,999

Bank sweep rates at Morgan Stanley, the largest retail brokerage firm, based on value of eligible deposit balances*

Balance

$5,000,000 and above

$2,000,000 —$4,999,999

$1,000,000 — $1,999,999

$500,000 —$999,999

$0 — $499,999

Bank sweep rates at Morgan Stanley, the largest retail brokerage firm, based on value of eligible deposit balances*

Balance

$5,000,000 and above

$2,000,000 —$4,999,999

$1,000,000 — $1,999,999

$500,000 —$999,999

$0 — $499,999

Bank sweep rates at Morgan Stanley, the largest retail brokerage firm, based on value of eligible deposit balances*

Balance

$5,000,000 and above

$2,000,000 —$4,999,999

$1,000,000 — $1,999,999

$500,000 —$999,999

$0 — $499,999

The sweeps aren’t hidden from investors. But investors who aren’t aware that their cash is being swept into bank programs or who don’t closely monitor their accounts—or make sure their brokers or advisers do—can be missing out on higher returns.

“This is something that investors have to watch out for,” says

Thorne Perkin,

president at Papamarkou Wellner Asset Management, an independent wealth manager. Adds

Doug Black,

founder of SpringReef LLC, which evaluates advisers for wealthy clients: “The money at stake is getting a lot bigger now” because of the much higher money-market rates of recent months.

‘Catch it and track it’

Investment advisers should be vigilant, says

Michael Kitces,

an independent adviser at Buckingham Wealth Partners, which has some client assets at Schwab. “We have to monitor when brokerage platforms send cash to low-yielding funds, catch it and track it,” he says. In general, limiting cash balances to under 2% of client assets can minimize the drag on returns, he says. Some independent advisers with client assets at Schwab use auto-rebalancing software for this purpose.

In a statement for this article, Schwab described its bank cash sweeps as a “starting point” to help clients “meet their everyday cash needs.” The firm added, “With just a few clicks, they can move their cash” to higher-yielding money-market funds, fixed-income funds or federally insured bank certificates of deposit. For example,

Schwab Value Advantage Money Fund

(SWVXX) currently yields 4.38%. Schwab also noted its bank sweep rate is above average for bank deposits.

Morgan Stanley likewise said it offers “numerous” alternative investments into which clients can deploy their cash after it has been automatically swept into the firm’s bank deposits. Merrill and JPMorgan declined to comment for this article.

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Competitors cite differences

Still, some financial firms don’t require such investor vigilance because they don’t automatically sweep cash into relatively low-interest accounts, and they are using that distinction as a marketing strategy. At two mutual-fund giants with many individual investors as clients, Vanguard Group and Fidelity Investments, uninvested cash is automatically swept into money-market funds currently yielding 4.4% and 4.02%, respectively.

Fidelity sent out emails last fall promoting the rate on its sweep fund as higher than Schwab’s and eight times the average for 10 other brokers tracked by Crane Data. In a statement for this article, Fidelity noted that some other companies put customers’ cash into low-yielding sweep products without offering another choice for where that money goes initially.

Andrew Kadjeski,

a retail brokerage executive at Vanguard Group, makes a similar point. Investors at many other firms “may wind up with too much cash in low-yielding funds,” he says. Vanguard, he adds, isn’t “looking at sweep practices as a way to generate revenue.”

At Schwab, the revenue from reinvesting the billions of dollars in customers’ sweep accounts into much higher-yielding assets has become so important to the firm’s financial results that analysts who follow its stock track and highlight the amount of bank sweep cash. The sweeps helped Schwab report record profit for 2022 despite a 13% drop in customer assets.

Sweeps also buoyed Morgan Stanley’s results. The firm’s bank sweep deposits held $198 billion in the fourth quarter, or 4.7% of the $4.2 trillion assets of Morgan Stanley wealth-management customers.

At Schwab, the $482 billion in sweep assets as of last September represented 7.3% of customer assets, according to a company presentation at a quarterly session with analysts. Funds invested from the sweeps generate an estimated 25% to 30% of Schwab’s revenue, according to

Richard Repetto,

a securities industry analyst at Piper Sandler Cos. The sweep funding combined with higher interest rates are “a significant driver of Schwab’s rising revenue,” Mr. Repetto says. Schwab declined to comment on that estimate or Mr. Repetto’s characterization of the importance of reinvested sweep assets to the firm.

Mr. Smith, a former financial reporter for The Wall Street Journal, is a writer in New York. He can be reached at reports@wsj.com.

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