Morgan Stanley boosts returns on client cash, analyst says

Morgan Stanley last week increased yields on cash held in advisory accounts, according to a report by an industry analyst, two-and-a-half years after large firms began facing questions on whether they were short-changing clients on interest rates.

“Morgan Stanley raised deposit rates on investment advisory accounts to 3.6%, from 2.2% previously,” according to a note Monday morning from Steven Chubak, managing director of Wolfe Research.

A spokesperson for Morgan Stanley declined to comment. Since 2023, large firms have been facing penalties and questions from regulators over interest rates for clients’ cash accounts.

Following news of Morgan Stanley’s bump in interest rates to clients’ cash holdings, Friday saw a selloff more broadly in wealth management and brokerage stocks, Chubak noted. Large wealth management firms see revenues and profits from cash held in clients accounts. A higher payout to clients would mean less profits from cash sweep accounts. 

The share price of Morgan Stanley declined 4% to $212.03, while LPL Financial Holdings Inc. and Stifel Financial Corp. dropped 3.1%, respectively, to $268.75 per share and $69.27 per share.  

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.

Now that clients can make a decent return on cash again, firms must tread carefully.

Meanwhile, Morgan Stanley’s work to fund more activities at the bank could be influencing the wirehouse’s decision to boost rates, Chubak noted.

“A number of investors pointed out the 3.6% rate was competitive with some of the highest yielding money market funds with some buy-siders deeming the 3.6% payout ‘unnecessarily high,’” the analyst wrote.

“While the deposit rate being offered is competitive with money market yields, one key difference between investment cash on balance sheet versus money market balances is that the former client cash that remains on balance sheet can be used to fund trading activities at the bank,” which the firm has made a priority, Chubak wrote.

The Securities and Exchange Commission last year ended its investigation into Morgan Stanley’s advisory cash sweep program without pursuing any enforcement action.

The closure of the probe brought to an end more than a year of scrutiny by the SEC’s enforcement division, which since April 2024 had sought  information regarding how uninvested client cash was swept into affiliated bank deposit accounts.