Sweep account

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A sweep account is an account set up at a bank or other financial institution where the funds are automatically managed between a primary cash account and secondary investment accounts.

[edit] General

A sweep account is actually a combination of two or more accounts at a bank or financial institution. It is useful in managing a steady cash flow between a cash account where scheduled payments are made from and an investment account where the cash is able to accrue a higher return.

Many banks and financial institutions offer a sweep account service for personal customers and small business owners. It has also become part of the arsenal of services offered by credit card companies.

[edit] How it works

In a sweep account

1. A cash account is setup first and a lump sum of money is deposited into that account.
2. A financial advisor and the client will discuss and determine an average balance that should be kept in this account. Depending on the institutions service programs, this amount may be pre-determined.
3. Most of the extra cash above the average balance will be invested into a Money Market, CD, or some other form of investment that can be easily liquidated.
4. When the balance in the cash account falls below the pre-determined average balance, some of the investment is liquidated and the proceeds get deposited into the cash account, thus maintaining the average balance.

If the initial calculations are done correctly, the interest on the cash and returns on the investments should yield a large enough return that will increase the total value of the sweep account.

During a bad economic cycle, the funds in the investment accounts may fall low enough that substantial gains will not be possible to maintain the average balance in the cash account. In these cases, the financial institutions would ask either for more funds to be put into the investment account, or recommend other forms of investments and liquidation.