Last year was actually pretty good for Frank Porcelli. When the markets started to roil, the Chicago-area accountant started trading and made some smart moves, buying oil and other commodities and shorting financials. In just a few months Porcelli earned about 8 percent on the $40,000 in his Roth IRA and his brokerage account. But by August he just couldn t take it anymore. The volatility was nuts up and down, up and down, he says. He logged on to his Wells Fargo account and clicked sell.

Where d the money go? Cash, Porcelli says. In other words, his default account, the brokerage equivalent of a shoebox. And five months later? Porcelli hadn t moved a dime.

Across the country, millions of Americans have been sitting on cash not at banks, not at credit unions, but in brokerage houses. Spooked by the crash on Wall Street last fall or nervous even earlier in the year, many dumped their mutual funds and bailed out of individual stocks. Then they gave their brokers one simple order put it in cash creating what analysts say could be a record amount of parked money. Indeed, while no one knows the exact size of these accounts, rough estimates suggest they easily top $600 billion. At one brokerage alone, E-Trade (ETFC), 29 percent of all consumer assets were in cash by last fall, up from 17 percent in 2007.

Money on the Sidelines

Today much of this money continues to sit in accounts with names like sweep, core and cash management. But while these holding places may seem no different from a savings account to the average investor, experts say they are one of the worst places to park your cash. Their yields the interest they pay to account holders have been falling across the board as the Federal Reserve cuts rates. And to make matters worse, most brokerages are simply paying less. Now some are offering rates as low as 0.01 percent, or $10 a year for every $100,000 invested. It s a terrible deal for the customer, according to Greg McBride, an analyst at Bankrate. The more money you have and the longer it sits, the worse it gets: The difference in rates is significant, and every day counts, McBride says.

In their defense, brokerages say their cash accounts are only supposed to be temporary holding tanks, not long-term investments. Paying interest on the accounts has become an industry standard, so the brokerages do pay a nominal rate, but earning interest is not the purpose, says Jim Frawley, a spokesperson at TD Ameritrade (AMTD), which pays 0.05 percent on its sweep account. It should be used for buying and selling; it s not for long-term cash. And brokerages acknowledge that investors can and should find higher rates elsewhere. Fidelity recently sent a note to investors who had money sitting in a core account for more than a year, reminding them that the account isn t a good choice for the long run.

But a year can really count, and analysts say brokers make more money if investors stay put. If an investor with $100,000 had spent 2008 in one of Fidelity s money-market funds, she could have earned almost $3,000 in interest. In Fidelity s sweep account, $420. And in recent years the sweep accounts themselves have gotten even worse for consumers. In 2007 the average sweep paid 2.7 percent in annual interest; today it s paying less than 0.2 percent. Brokers figure it s a captive audience, says Matt Bienfang, an analyst at the Tower Group. They could pay more, but they don t.

Brokers Wooed Cash

With investors dropping stocks and bonds like hot coals, cash is big business these days. But brokers have been hyping their cash-management abilities for almost a decade, ever since they started merging with banks. With campaigns like Total Merrill and Citi Never Sleeps, big firms like Merrill Lynch and Citigroup have been promising to help with all of a customer s financial needs not just investments but credit cards, mortgages, and checking and savings accounts. In exchange for putting all their money in one place, customers could see all their financial information on one statement and in theory, work with an adviser who understands their complete financial picture.

But banking services also became a huge cash cow for the brokerages. Customers who have all their assets in one place are less likely to move their money, and bank products can be more profitable than traditional investment accounts. And perhaps most important, the switch enabled brokerages to use bank deposit accounts instead of money-market funds for their brokerage sweep accounts. Until a few years ago, your extra cash usually went into a money-market fund, where you could earn interest in the mid single digits. But money funds were not particularly profitable for the brokerage, which would earn only a small fee to run the fund. On a bank account, on the other hand, the broker could effectively pay whatever interest it wanted, reinvest the money at higher rates elsewhere and pocket the difference. Those spreads have been as wide as 3 percentage points, says Matt Snowling, an analyst at FBR Capital Markets. The profits have rolled in: Analysts estimate that Merrill made $2.4 billion by reinvesting customers cash last year, up from $1.3 billion in 2004. (Merrill says it doesn t disclose that specific statistic.)

Missing Out on Interest

The brokerage clients, meanwhile, rarely hear from brokers about the interest they re earning even in some large accounts. In Alma, Mich., Larry and Mary Evans decided when their oldest son graduated from high school in 2007 that it was time to protect their recent gains in the market. Larry, an ophthalmologist, called his broker at Raymond James and asked him to take all his investments more than $1 million in all and move them to cash. At the time, his cash account was earning between 3.5 and 4 percent. Today it pays 0.05 percent. Over 18 months those sliding rates meant the Evanses likely missed out on at least $37,000 in interest. Although Larry couldn t have picked a better time to get out of the stock market, he admits that when it comes to that cash account, I should have been more savvy. But between the profit-sharing plans from his medical practice, several IRAs, Roth IRAs and college savings accounts, he says, it s like, Man, just put it in cash, and I ll get back to you. And time flies.

The sweep problem isn t limited to big, national brokerages. Independent financial planners often promote themselves as champions of the little guy. But critics say that they, too, often let their clients leave their money in low-paying sweeps. Every independent adviser uses a brokerage for client accounts, and Dennis Houlihan, a financial adviser in Fort Wayne, Ind., says his brokerage, TD Ameritrade, discourages him from using anything for cash other than its proprietary sweep account. Houlihan acknowledges that he could steer his clients cash to higher-yield accounts or funds outside the TD umbrella. But like many investors, he doesn t want the logistical headache. I m managing wealth; I m not managing money markets and checking accounts, he says. Besides, do you really want five statements coming to you? Lately, for yield, he s been putting his clients in short-term corporate bonds, including mortgage lender Countrywide s.

The Costs of Alternatives

Brokers say the ultralow interest is the price you pay for the ability to jump back into the market at any moment. We wanted enough liquidity so we could stagger it back into the market when the time was right, says Charles Nemes, who is Larry Evans s broker at Raymond James. Why not a high-yield savings account? Nemes questions its safety not an unreasonable concern in the current credit squeeze. And other brokers point out that actively choosing a better money-market fund might not be worth it if it means the investor has to pay a commission every time he wants access to cash. In any case, you can direct it to some other vehicle, says Alex Samuelson, a spokesperson for Smith Barney, which currently pays 0.1 percent on accounts smaller than $250,000. All you have to do is ask.

Indeed, investors do have other alternatives for their cash, and planners say it doesn t take a lot of effort to find them. Some online brokers offer high-yield savings and checking accounts that link directly to a brokerage account. E-Trade s savings account was recently paying 2.5 percent; Schwab s investor checking was yielding 1 percent. And TD Ameritrade was planning this winter to introduce a suite of higher-paying cash products. We know people want better yields, says spokesperson Frawley, who adds that the firm would rather pay up than lose customers.

To really get a competitive yield, however, investors often have to step outside their brokerage. Vanguard and Fidelity offer multiple taxable and tax-exempt money-market funds that have typically paid higher yields, and you can link them to your other brokerage account, so when you re ready to buy stocks again, it s easy to transfer the cash. Yes, it takes a few days to move the money, and you ll get another statement. Don t want the hassle? Porcelli, the Chicago-area accountant, says he solved the problem of his low-yielding cash account in January: I got back into the market.

Additional reporting by Roya Wolverson