Barron's Writes on Pressure on Sweeps
Barron's published "Morgan Stanley Raises Rates on Cash. It's a Sign of Pressure Across Industry." The article explains, "For years, investors' uninvested cash has been a lucrative revenue source for the wealth management industry. Companies have been paying customers paltry interest on that cash even as rates overall soared over the past two years, allowing firms to earn much higher yields than they paid out to their clients in many cases. Now, that's beginning to change. Morgan Stanley will raise rates on some customers' uninvested cash in advisory accounts, a spokeswoman confirmed Wednesday. Effective Aug. 1, clients with $250,000 or more in deposits in the program will receive a yield of 2%. The company currently pays 0.01% on balances between $250,000 and $500,000. Morgan Stanley indicated last week that these changes were coming." The piece explains, "`It isn't the only wealth manager making adjustments. Wells Fargo said Friday July 12 that it had bumped up the interest it pays on clients' uninvested cash. That some of the nation's largest wealth managers are now raising rates on cash has shareholders concerned about the ripple effects on net interest income, an important profit center for wealth managers. Last week saw a selloff in wealth management stocks -- 11% on average -- as Wells Fargo and Morgan Stanley announced changes that raised alarms among analysts about potential hits to future profits as well as lurking competitive, regulatory, and legal pressures related to how firms have treated uninvested client cash." Barron's says, "The fact that some firms have been sweeping customers' uninvested cash into low-yielding bank accounts and then making a profit by lending out that cash at much higher interest rates is turning into a thorny legal issue. Across the industry, wealth managers generally pay clients about 1% or less on sweep deposits.... Rates at 5% are readily available in money-market funds." They add, "Newly filed lawsuits are taking aim at brokerage and wealth management companies' cash practices, which they say fall short of the fiduciary standard. Such suits are less likely to come from self-directed investors who have the opportunity to seek out higher yields for their uninvested cash if they want. Last week, a customer of LPL Financial sued the company for alleged breach of fiduciary duty and 'unjust enrichment' related to LPL's cash sweep programs."
