It appears that large wealth management businesses are running into a wall over the amount they are paying clients in interest for certain cash accounts.
The Securities and Exchange Commission has been focused on cash sweep account options for the past few years and has made sizable settlements regarding the issue, most notably with the Charles Schwab Corp. in 2022 for $187 million.
Wells Fargo disclosed last fall that it was facing an “advisory account cash sweep investigation” by the commission. Advisory accounts at broker-dealers charge clients fees rather than commissions.
Now, Wells Fargo's Wealth and Investment Management group, which includes its 12,000 brokers, banks reps and financial advisors, has changed the pricing for such accounts in what looks like a win for clients while costing the firm hundreds of millions of dollars in income.
"Late in the second quarter, we increased pricing in Wealth and Investment Management on sweep deposits and advisory brokerage accounts," said Mike Santomassimo, chief financial officer, in a call with analysts on Friday to discuss the bank's second quarter earnings. "This change was not anticipated in our original guidance, federal lines rates paid-in money market funds and is expected to reduce net interest income by approximately $350 million this year."
"This was very specific to a sweep product in the wealth business," Santomassimo added. "It's a portion of that overall deposit, and it doesn't have any bearing on any other products."
A Wells Fargo spokesperson said the company had nothing to add beyond the discussion during the conference call on Friday.
After the 2008 credit crisis, interest rates fell to zero, essentially decimating a profit center for broker-dealers that had made money on client cash. Broker-dealers profit from cash held in client accounts, margin loans used to buy more securities and banking activity in general.
Interest rates crept up again before the Covid crisis of 2020, then bottomed out once more as the Federal Reserve slashed interest rates to stimulate the economy. But since January 2022, interest rates have risen once more, meaning broker-dealers and RIAs have another way to boost income.
One senior industry executive noted that the disclosure by Wells Fargo about its repricing of client cash could spell more ugly disclosures as earnings season for banks and broker-dealers continues the next few weeks.
"Do these disclosure issues and conflicts at Wells Fargo also exist at peers, and will this become more widespread," asked the executive, who spoke confidentially to InvestmentNews. "And is this issue specific to the wirehouses like Wells Fargo or will it impact other independent broker-dealers with advisory arms, too?"
As phased retirement and "unretirement" become normal, working past the traditional retirement age of 65 helps with finances and can help slow cognitive decline.
In reality, the firm managed less than $25 million, according to the SEC.
Future Proof CEO Matt Middleton reflects on the event's rapid growth as it prepares to welcome around 4,500 professionals to Huntington Beach.
Wealth managers are adding protection and modifying duration as the Fed prepares to cut rates.
George Acheampong, the founder of Melanin Money, has an ambitious goal – to reduce the racial wealth gap by $100 billion.
Uncover the key initiatives behind Destiny Wealth Partners’ success and how it became one of the fastest growing fee-only RIAs.
Morningstar’s Joe Agostinelli highlights strategies for advisors to deepen client engagement and drive success
