Retail brokerage, wealth management firms to face continued pressure on margins

The retail brokerage and wealth management industry is looking strong, but also facing continued downward pressure on profit margins.

A new report from Fitch Ratings highlights that pre-tax profit margins at firms fell modestly in the first half of 2024 compared to the record levels seen by most firms in 2023, and despite the industry’s strength it will be challenging to maintain or grow margins in the months ahead.

Firms have reported strong growth in assets under management and administration, thanks to equity market performance, organic growth in new clients, and solid advisor recruitment. But they have also seen higher costs.

“An increase in transactional and advisory revenues due to higher client activity and account values was more than offset by higher expenses and lower net interest income,” said Fitch director Tana Marcom. “Due to recent market volatility, margin pressure will persist, yet remain strong and supportive of ratings.”

The report, Retail Brokers and Wealth Management Firms: 1H24 Dashboard also noted that client cash balances (except money market funds) have continued to decline, although Fitch still expects cash sorting activity to moderate this year with the Fed funds rate likely reaching a peak. Most wealth management firms are only conservatively leveraged and this remains stable, the report notes.

While some major firms including wirehouses have faced scrutiny over cash sweeps, for the independent channel Fitch says that cash sweeps remain a small percentage of total advisory assets and primarily serve as a source of account liquidity.