Last week, BNY Mellon and a number of other financial firms released second quarter earnings, which shed some light on the growing pain of fee waivers versus the benefits of higher money fund balances on asset managers. BNY's release explains, "Fee revenue increased 2% primarily reflecting higher fees in Pershing and Asset Servicing, partially offset by money market fee waivers, lower investment management fees and the unfavorable impact of a stronger U.S. dollar." Crane Data estimates that fee waivers are costing funds about 7 basis points currently; the average charged expense ratio for our Crane 100 MF Index has declined from 0.27% to 0.20% since the start of the year. (Note: Thanks to those who attended "Crane's Money Fund Webinar: Portfolio Manager Perspectives" yesterday, and thanks to Federated Hermes' Sue Hill, Northern Trust Asset Management's Peter Yi and UBS Asset Management's David Walczak for participating. Nice job! Click here to access the recording and click here to see our Webinar page.)

For BNY's Pershing division, they comment, "The year-over-year increase primarily reflects higher money market fund balances and clearing volumes, partially offset by the impact of rate-driven money market fee waivers. The sequential decrease primarily reflects the impact of rate-driven money market fee waivers, a one-time fee recorded in 1Q20 and lower clearing volumes, partially offset by higher money market fund balances."

Discussing its Investment Management (formerly Asset Management) unit, the release explains, "The year-over-year decrease primarily reflects the unfavorable change in the mix of AUM since 2Q19 and the impact of money market fee waivers, partially offset by equity investment gains (net of hedges), including seed capital. The sequential increase primarily reflects equity investment gains (net of hedges), including seed capital, partially offset by the timing of performance fees and the impact of money market fee waivers."

On the company's earnings call, CEO Thomas Gibbons comments, "The low interest rate environment will present a significant challenge, both through net interest revenue and money market fee waivers in Pershing and Investment Management and to a lesser extent, other Investment Services businesses. But at the same time, we will benefit from increases in transaction volumes, FX volatility, stronger market levels and activity in our clearance and collateral management business."

CFO Michael Santomassimo (who was just appointed new CEO of Wells Fargo) explains, "Distribution expenses were only slightly impacted by money market fee waivers in Investment Management, as the bulk of the impact from money market fee waivers ... was in Pershing and from third-party funds.... In Pershing, revenue was up 1% to $578 million, despite the impact of money market fee waivers, reflecting much higher money market fund balances, which were up 40% and higher transaction volumes, but down from the exceptional volumes we experienced in the first quarter. The net impact of money market fee waivers, partially offset by higher money market fund balances negatively impacted Pershing's revenue growth by 3%."

He continues, "Now on money market fee waivers, the pre-tax impact in the second quarter was $18 million net of distribution expense, with the biggest impact in Pershing. It's important to note that ... approximately $50 million of this impact has been offset by a substantial increase in money market fund balances, resulting in a net impact of approximately $30 million in the second quarter. We expect the impact from fee waivers to increase in the third quarter by about $30 million to $45 million net of lower distribution expenses. This additional impact in the third quarter would also be reduced if money market fund balances continue to grow. A little over half of that impact will be in Pershing, with the rest of the Investment Management and Asset Servicing."

Santomassimo adds, "We currently expect that we will incur an incremental $25 million in the fourth quarter and will be at a full run rate impact from fee waivers of about $135 million to $150 million, offset by the incremental money market fund balance growth that we’ve seen in the second quarter for a net impact of about $85 million to $100 million per quarter by year-end. This quarterly impact could be reduced if money market fund balances continue to grow further."

During the Q&A, he was asked about Pershing money fund balances and answers, "There's actually a couple of drivers underneath the fund balances. One, we're obviously seeing in Pershing, [but] that's not something that we disclose. And two, we're also seeing growth in Asset Servicing as well, where we sweep money into money market funds through our open architecture platforms [into their funds but] also a bunch of other complexes. Those two numbers are not something that we disclose. So we've seen growth across the platform. We've seen growth really in all channels."

Gibbons responds, "So we see some stability here as we reset around the very low interest rate environment.... That same impact is going to be fully reset through fee waivers by the end of the year. And if you look at the disclosures that Mike had given you, it's very specific to what that is. We don't know what the actual balances are going to be. So if the balances grow, then that impact can be quite a bit less, because there'll be additional income related to money market balances. So I wanted to make that clear."

Santomassimo also says, "When you look at the $50 million to $75 million, at that point, it was unclear what was going to happen with money fund balances. So I think the $50 million to $75 million was the gross impact. As we sort of look at the $85 million to $100 million, that's the net impact of now is accounting for the fact that we think the balance growth that we saw is going to stick with us for a while. So if you look at what I gave in my script, I said by the fourth quarter, the gross impact will be $135 million to $150 million, which ... is equivalent to that $50 million to $75 million. But it'll be offset by the fact that we think the balances will stick around. So that's how you get them [to] $75 million to $100 million."

Charles Schwab also commented on waivers in its earnings press release. CFO Peter Crawford tells us, "As the impact of the Fed's dramatic monetary easing during March extended across the yield curve, the further compression in asset returns outweighed growth in client cash sweep balances from both ongoing asset gathering and the USAA acquisition, driving a 14% year-over-year decline in net interest revenue to $1.4 billion.... Asset management and administration fees increased 2% year-over-year to $801 million as a result of clients' increased utilization of money market funds and higher balances in advisory solutions, including managed account assets transferred from USAA."

He adds, "These increases more than offset the effect of money market fund fee waivers due to declining portfolio yields, lower Mutual Fund OneSource balances, and pressured equity market valuations at the beginning of the quarter.... The sharp pandemic-driven increase in client sweep deposits during the first quarter was followed by more modest balance sheet expansion over the past three months, and after adding approximately $10 billion of USAA client cash to our deposits we ended June with total assets of $400 billion, up 8% from month-end March." See also, Axios' piece, "Charles Schwab earnings point to trouble for zero-fee brokerages."

Finally, Morgan Stanley also briefly mentioned "cash" on its Q2 earnings call. CFO Jon Pruzan says, "Strong performance in cash and derivatives, as well as a rebound in prime brokerage balances, contributed to results. Cash and derivative revenues were the highest in over a decade driven by strong trading results across regions as we continue to help our clients navigate through this period of unprecedented uncertainty. In cash in the face of historic volumes, we executed for clients and help keep markets open and functioning." CEO James Gorman adds, "The wealth management margins, the material change in those margins was the net interest income change in rates, and as we move to zero rates now you can have a view rates will be permanently zero in which case we'll have to do other things to enhance that business."

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