Boosting payouts on cash crimps wealth management at Wells Fargo

Wells Fargo & Co.’s Wealth and Investment Management group, which includes its 12,000 brokers, banks reps, and financial advisors, in July said it was changing the pricing for cash sweeps in advisory accounts, in what looked like a win for clients that would cost the firm hundreds of millions of dollars in income.

That change would cost the bank $350 million after it raised rates on cash sweeps in the second half, it said at the time.

That is coming to pass as Wells Fargo on Friday reported that its Wealth & Investment Management division, known internally as WIM, posted net income of $529 million over the three months ending Sept. 30, flat with the same period last year.

While revenue was up 5 percent to almost $3.9 billion for the quarter compared to the same timeframe last year, net interest income was down 16 percent, to $842 million.

That was “driven by higher deposit costs reflecting increased pricing on sweep deposits in advisory brokerage accounts and customer reallocation of cash into higher yielding alternatives,” the bank stated in its third quarter earnings release.

“This decline was due to the increased pricing on sweep deposits and advisory brokerage accounts and wealth and investment management that we highlighted on last quarter's call,” Chief Financial Officer Mike Santomassimo said on Wells Fargo’s call with analysts Friday morning to discuss its earnings.

But it wasn’t all bad news for the bank, he added, with some clients keeping cash in place rather than moving it to higher yielding options.

“This was the lowest linked-quarter decline in net interest income since third quarter 2023, as customer migration to higher yielding deposit products continued to slow and the pace of deposit pricing increases also decelerated,” Santomassimo said.

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.

Despite falling short in hitting its net interest income targets, Wells Fargo reported other positive results, noted Steven Chubak, managing director of Wolfe Research. Those included fee momentum, such as trading gains, expense control and headcount reduction, and lower credit costs.

WIM’s “noninterest expense increased 5 percent due to higher revenue-related compensation, partially offset by lower operating costs and the impact of efficiency initiatives,” according to the company.

Total client assets at Wells Fargo’s WIM group jumped 18 percent at the end of September compared to a year earlier, totaling almost $2.3 trillion.