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Investor Files Breach of Contract Lawsuit Against Merrill Lynch

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An investor is taking legal action against Merrill Lynch, alleging that the company violated its contractual obligations by providing inadequate interest rates on cash sweep accounts held by retirement clients in the self-directed Merrill Edge channel.

The plaintiff, Margaret McCrary, a Merrill client from Michigan who transferred her 401(k) account to an IRA with the brokerage, is seeking certification as a class action lawsuit on behalf of investors who held Merrill Edge retirement accounts since March 2022.

According to McCrary’s claims, the Merrill Edge client agreement includes a commitment from the firm to offer a “reasonable rate of interest” on cash held in sweep accounts. However, retirement account holders were reportedly paid rates that well below what competitors in the market were offering.

While the Federal Reserve was progressively increasing benchmark interest rates throughout 2022 and into 2023, Merrill Edge only offered a meager 0.01% interest on cash for clients with less than $1 million invested with the firm. In contrast, competitors such as Fidelity Investments, Robinhood, and Vanguard Investments directed cash into independent, unaffiliated banks that paid significantly higher rates. Conversely, Merrill moved clients’ cash into accounts with its parent company, Bank of America.

The lawsuit states that in August 2023, Fidelity began offering interest rates as high as 2.72%, regardless of a client’s account balance. Similarly, as of September, R.W. Baird was paying interest rates on cash sweep accounts ranging between 2.07% and 4.15%, as supported by the complaint.

According to the lawsuit, Merrill consistently offered the lowest rates on swept cash among surveyed brokerage firms by Crane Data and BofA Securities—regardless of whether these brokerages directed cash to affiliated or unaffiliated banks.

Merrill Lynch Facing Allegations Over Low Interest Rates

Merrill Lynch, a major financial firm, is once again facing allegations regarding its low interest rates. This is not the first time the company has encountered such accusations. In 2019, client Sarah Valelly filed a lawsuit against Merrill Lynch on the same grounds. Although the case was initially dismissed in 2020, it resurfaced as an amended complaint and is currently being litigated in federal district court in New York. Wolf Popper, the law firm representing Valelly, is also handling the new case brought by McCrary.

Regarding these allegations, a Merrill Lynch spokesperson stated, “This is the third complaint these lawyers have brought on the same issue over the last four years.” Despite the recurring claims, Merrill Lynch asserts its successful defense against them thus far and intends to continue doing so.

However, the spokesperson declined to comment on the volume of assets held in Merrill Edge accounts. Lindsay Hans, one of the co-heads of Merrill Lynch Wealth Management, previously revealed that the firm serves approximately 3.7 million clients through its channel.

It’s worth noting that Merrill Lynch is not alone in facing controversy over low interest rates in cash accounts. Charles Schwab, another prominent financial institution, also pays low rates on its cash sweep accounts. In an attempt to mitigate this issue, Schwab encourages customers to transfer their cash holdings to higher-yielding accounts, a practice commonly referred to as cash sorting. However, this strategy has negatively impacted Schwab’s net interest earnings this year.

The lawsuit against Merrill Lynch seeks an injunction to prevent the firm from persisting with its allegedly unreasonable rate of interest on retirement sweep accounts. Additionally, it demands damages and interest.

As of Wednesday afternoon, Merrill Lynch had not yet responded to the court filing.

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