Morgan Stanley increases cash sweep pricing for advisory clients

Even as the wealth management operations of the wirehouses benefit from a record breaking stock market, a stumbling block in the way of higher profits is emerging: the amount they are paying clients in interest for certain cash advisory accounts.

As interest rates soared over the past couple years, some financial advisors and clients have criticized their firms for short-changing them on yield and interest generated from cash deposits. The Securities and Exchange Commission has been focused on cash sweep account options and hit firms with penalties over the matter.

The return clients are getting on cash appears to be front and center of the industry right now.

"This was a big deal a year or two ago with the Securities and Exchange Commission, but these recent moves look more like a result from competitive pressure," said a senior industry executive who spoke confidentially to InvestmentNews. "Clients are waking up to fact you can get better yields on money market funds rather than these bank sweep advisory accounts."

"Remember, in advisory accounts, the financial advisor needs to keep the money invested or the client won't keep up with the benchmarks," the executive added.

Wells Fargo & Co. on Friday said it changed the pricing on cash sweep deposits and advisory brokerage accounts, and the increase is expected to cost the wealth management arm of the bank $350 million this year in income.

Morgan Stanley executives Tuesday morning in a conference call with analysts to discuss second quarter earnings said that, like Wells Fargo, it was raising rates on clients' cash in advisory sweep accounts. But the firm did not say how much net interest income the change could cost the firm's wealth management business.

"In the third quarter, we intend to make changes to our advisory sweep rates against the backdrop of changing competitive dynamics. The impact of these intended changes will be largely offset with the expected gains from the repricing of our investment portfolio," said Sharon Yeshaya, the firm's chief financial officer. "Therefore third quarter [net interest income] will be primarily driven by the path of sweeps, and NII could decline modestly in the third quarter."

Later in the call she declined to comment when asked whether Morgan Stanley was under any regulatory pressure to have better pricing for clients on certain cash accounts.

Net interest income was down 3% quarter over quarter at Morgan Stanley, below company guidance, wrote UBS analyst Brennan Hawken, in a research note Tuesday morning. "More importantly, given recent increases to yield in advisory accounts at [Bank of American Corp.} and {Wells Fargo], the outlook for NII may be at risk."

Meanwhile, Morgan Stanley reported record client assets of $5.7 trillion, up 16% from the second quarter last year. The wirehouse also reported net new assets for the three months ending in June of $36.4 billion and $131 billion year-to-date, an annualized growth rate of over 5%.

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.