Moody’s has issued a warning that the ongoing regulatory investigations into wealth managers’ cash sweep programs could potentially lead to credit rating downgrades, which in turn could increase costs for these firms. This comes at a time when concerns about the economy are rising, with worries of a looming downturn due to tight monetary policies.
Cash sweep programs are designed to allow wealth managers to transfer un-invested cash from brokerage accounts to partner banks, enabling clients to earn returns on idle funds. However, these programs have been at the center of disputes as the interest rates paid by partner banks are often lower than what customers could earn through other investment options like money market funds.
Efforts to Address Concerns
To address these conflicts, wealth managers have started offering clients more choices when it comes to managing their un-invested cash. Clients now have the option to park their money in tax-exempt funds or other vehicles instead of automatically transferring it to partner banks. Firms like Morgan Stanley, Wells Fargo, and Bank of America have also taken steps to raise the interest rates they pay on certain brokerage accounts.
Despite these efforts, regulatory investigations into cash sweep programs remain a significant concern for wealth managers. Both Wells Fargo and Morgan Stanley have disclosed that their programs are under review by the Securities and Exchange Commission (SEC), while Bank of America has highlighted it as a potential risk factor in its quarterly filing. Moody’s suggests that having multiple revenue streams can help mitigate some of the risks for larger firms, but warns that private-equity owned wealth managers with high debt burdens and less diversified business models may be more vulnerable to the impact of these investigations.
Moody’s also notes that the ongoing investigations could potentially squeeze margins across the industry by forcing firms to increase the interest rates on brokerage accounts. This, in turn, could have a significant impact on the profitability of wealth management firms, particularly those with less diversified business models and heavy debt burdens. Ultimately, the outcome of these investigations could have far-reaching implications for the credit ratings and financial stability of wealth managers in the industry.