Cash sweep scrutiny threatens wealth managers' credit ratings, Moody's says (updated)

Ameriprise Financial

16/08/2024 18:28

(Adds comment from the report's lead author in paragraph 10)
    By Niket  Nishant
       Aug 16 (Reuters) - The spate of regulatory investigations into wealth
managers' cash sweep programs could hurt their credit ratings, Moody's Ratings
warned on Thursday, underscoring the threat to the high-margin business for
firms like Morgan Stanley  MS.N  and Wells Fargo  WFC.N .
    
    WHY IT'S IMPORTANT
    A potential ratings downgrade would increase the costs for wealth managers
at a time when worries about the economy are growing, with some forecasting a
downturn due to the tight monetary policy.
    
    CONTEXT
    Cash sweep programs allow wealth managers to move un-invested cash in
brokerage accounts to partner banks, enabling clients to earn returns on idle
funds.
    However, these arrangements have led to disputes, as the interest paid by
partner banks is typically lower than what customers could earn through other
options, such as money market funds.
        To prevent these conflicts, wealth managers have started giving clients
more choices. Customers can opt to park their un-invested money in tax-exempt
funds or other vehicles instead of moving it to their brokers' partner banks.
    Morgan Stanley, Wells Fargo and Bank of America  BAC.N  have also raised the
interest rates they pay on some brokerage accounts.
    Despite these efforts, regulatory investigations remain a concern. Wells
Fargo and Morgan Stanley have disclosed their cash sweep programs are under
review from the SEC, while Bank of America highlighted it as a potential risk
factor in its quarterly filing. 
         Moody's said that having multiple revenue streams will help mitigate
the risk for larger firms. However, private-equity owned wealth managers with
high debt burdens and less diversified business models are likely to be more
severely affected.
    The investigations could squeeze margins across the industry by prompting
firms to increase the interest on brokerage accounts, the ratings agency added. 
    
    KEY QUOTE
        "Increased competition could propel consolidation in this space,
depending on how many sweep accounts are affected and how much revenue is lost,"
said Gabriel Hack, assistant vice president at Moody's Ratings and the lead
author of the report.
  

 (Reporting by Niket Nishant in Bengaluru; Editing by Tasim Zahid)
 ((Niket.Nishant@thomsonreuters.com;))