We wrote earlier this week on a number of earnings reports which show a continued shift from bank deposits into money market funds. (See our July 17 News, "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues.") The Wall Street Journal covers the topic in, "Yield-Hungry Wealth Management Clients Are Becoming a Headache for Big Banks." They explain, "Brokerage customers are still demanding more for their cash. And banks are scrambling to keep up. Across several banks with large wealth-management businesses, a common theme in second-quarter earnings reports was continuing to have to pay higher rates to hang on to brokerage customers' cash that isn't invested in things like stocks and bonds. Wells Fargo and Morgan Stanley called out increases in some of the rates they pay on certain brokerage account deposit products, and Bank of America noted a rise in rates paid on wealth-management deposits."
The article continues, "Since interest rates began to climb in 2022, banks have had to figure out ways to slow the bleeding of low-cost deposits to things like high-yield online savings accounts, certificates of deposit or money-market funds. This leakage has been a major factor squeezing banks' net interest earnings. As rates crest, and ultimately start to fall, that pressure should begin to ease, but the question is how fast. With many investors expecting just one rate cut for now, they may keep wanting good returns for their cash for longer."
The Journal says, "Where pricing pressure appears to still be most acute is in brokerage accounts, where people often keep money they aim to earn on -- rather than what just sits in a checking or lower-yielding savings account, waiting to be spent. It didn't help that the second quarter saw many customers taking cash out of their banks to pay taxes, which added to the overall scarcity of deposits."
They add, "Bank of America on Tuesday said that the quarter-over-quarter increase in the total rate paid across deposits in its global wealth and investment management business accelerated for the first time in several quarters as customers continued to rotate their cash.... Morgan Stanley told analysts on Tuesday that it intends to make changes to some brokerage advisory sweep deposit rates 'against the backdrop of changing competitive dynamics.'"
Investment News also has been writing about the increase in advisory sweep rates mentioned on some of the earnings calls. Their piece, "Wells Fargo discloses problems with fees on cash," tells us, "It appears that large wealth management businesses are running into a wall over the amount they are paying clients in interest for certain cash accounts. The Securities and Exchange Commission has been focused on cash sweep account options for the past few years.... Wells Fargo disclosed last fall that it was facing an 'advisory account cash sweep investigation' by the commission."
They explain, "Advisory accounts at broker-dealers charge clients fees rather than commissions. Now, Wells Fargo's Wealth and Investment Management group, which includes its 12,000 brokers, banks reps and financial advisors, has changed the pricing for such accounts in what looks like a win for clients while costing the firm hundreds of millions of dollars in income.... A Wells Fargo spokesperson said the company had nothing to add beyond the discussion during the conference call on Friday."
Another recent Investment News' update, "Morgan Stanley increases cash sweep pricing for advisory clients," comments, "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."
They quote Morgan Stanley CFO Sharon Yeshaya from their earnings call, "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.... 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."
In other news, State Street Global Advisors (SSGA) recently published a "Q3 2024 Cash Outlook: Poised to be Eventful." It states, "The Fed's policy rate trajectory remains uncertain, with expectations of rate cuts in 2024 diminishing. But several other factors, such as the US presidential election, record cash levels, and regulatory changes in the money market fund industry, could be just as consequential for investors."
They discuss, "Record Liquidity Levels," writing, "Abundant liquidity in the system, as evidenced by the record-high commercial bank deposits (over $17 trillion) and money market balances (over $6 trillion), indicates ready cash to deploy in the event of a market repricing or if an attractive business opportunity presents itself. This excess liquidity may cushion against potential market downturns."
SSGA says, "The substantial issuance of US Treasury Bills has been readily absorbed by money market funds and other cash investors, contributing to stable funding markets. The continued attractiveness of T-Bill rates may further support demand and provide a haven in these uncertain markets.... Commercial paper yields, although slightly cheaper than months ago, remain relatively expensive given a potential recessionary environment and the relative value proposition compared to T-bills. Additionally, impending money market fund reforms, which could significantly impact institutional prime money market funds, may create upward pressure on yields."
They conclude, "The second half of 2024 will be far from quiet, with a confluence of events and evolving data shaping market dynamics. The presidential election, Federal Reserve policy decisions, record liquidity levels, and regulatory changes in the money market fund industry are just some of the factors that will contribute to an eventful and potentially volatile market environment. While uncertainty abounds, ample liquidity, resilient funding markets, and attractive yields in certain segments may offer opportunities for investors who remain vigilant and adaptable. By closely monitoring these key areas and adjusting strategies accordingly, investors can navigate the challenges and capitalize on opportunities that lie ahead."
