With gloabl uncertainty due to the Iran war, the S&P 500 dropped 4.6% over the first three months of this year, its worst quarterly performance since 2022.
The result? Financial advice firms large and small will likely see or report a decline in revenue due to lower asset levels in stocks.
“Last quarter, both the equity and bond markets felt pressure, meaning there was nowhere for firms and advisors to hide,” said Larry Roth, founder and managing partner of Ascentix Partners and the former CEO of both Cetera Financial and Advisor Group, now Osaic.
“This will have an impact but it’s not at the level where it will kill you, but it will be felt,” Roth said. “When markets improve almost every quarter, like they recently have, that camouflages a lot of issues, like advisor attrition or tech deficiencies.”
Because broker-dealers and registered investment advisors use a variety of methods for calculating fees, that decline in revenue could hit firms’ books either this quarter or next, analysts and industry executives noted.
Large banks with significant wealth management businesses – think Wells Fargo & Co. and Bank of America Inc. - will start reporting their financial results next week. Big firms more reliant on financial advisors to drive revenue such as Raymond James Financial Inc. and LPL Financial Holdings Inc. will follow days later.
Volatility on a macroeconomic level and geopolitical fallout from the Iran war did not hit stocks until the latter half of the first quarter, wrote Steven Chubak, a Wolfe Research analyst in a note this week.
But the outlook for the second quarter, “and beyond, remains murky, with equity market sensitive fees likely to come under further pressure” this quarter, due to pricing models firms use that sometimes lag the market, he added.
Wealth management firms have enjoyed a sort of golden age since the 2008 credit crisis; the stock market has continued to hit record highs over that period, resulting in record results for many firms. In turn, many firms' stock prices or, for those privately held, valuations, have also seen record highs.
“The market value for stocks affects fee billing,” said one senior industry executive who spoke privately to InvestmentNews about the matter. “Some firms charge in advance at the start of the quarter, some in arrears at the quarter’s end, and some charge monthly.”
“It’s hard to do a comparison because firms charge customers differently, but the firms that depend on advisory fees will feel an impact because asset levels are lower,” the executive said.
Ten-year Treasury yields increased during the quarter, which means bond yields in general were up. Banks and brokerages that depend on revenue from spreads on bonds will benefit from that, the executive added.
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