This week, we heard another batch of second-quarter earnings calls for brokerages, and the analyst questions keep pouring in over advisory sweeps, cash sorting and regulatory and legal pressure for some firms to pay higher rates. Ameriprise Financial CFO Walter Berman comments on their Q2 earnings call, "Total cash balances, including third-party money market funds and brokered CDs, were $81.9 billion, which was over 8% of clients' assets. Clients remain heavily concentrated in yield-oriented products, with highly liquid products like money market funds being more in favor than term products like certificates and brokered CDs. We are beginning to see clients put money back to work in wrap and other products on our platform, and we expect this to continue over time as markets and rates normalize, which creates a significant opportunity. Cash balances, excluding money market funds and brokered CDs, were $40.6 billion, driven by normal seasonal tax patterns and the transition of cash related to [the] Comerica partnership.... Underlying cash sweep was stable in the quarter as expected, and that trend continues in July. I want to provide some additional perspective on sweep cash. Our cash sweep is a transaction account for money in motion that is in between investments or for cash to pay fees, which is similar to a bank checking account. `Cash sweep is not meant to be an investment option for significant cash balances over extended periods. We have a broad range of higher-yielding products available for clients seeking to hold cash over extended periods, which is where a large portion of the excess cash has gone. As a result, our clients generally have very low cash rebalances, which are now approximately $6,000 on average. At this point, we do not anticipate any changes in our approach to cash sweep." (For more, see these Crane Data News articles: "Barron's Writes on Pressure on Sweeps" (7/25/24), "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures" (7/19/24) and "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues" (7/17/24).)
During the Q&A, Analyst Suneet Kamath from Jefferies asks, "I wanted to start with the cash sweep commentary.... So it doesn't sound like you’re planning on making any big changes, but I know in the past, you've said that's always subject to the competitive environment. Obviously, we've seen a handful of companies take some actions on their cash sweep rate. So I guess the question is I'm trying to reconcile those two [statements]. Is it that the moves that those peers are making are sort of catching up to you? Or is your sort of client account size different that you're just not experiencing the same need to make those changes?" Berman responds, "Let me start ... as you know, we operate within regulatory and fiduciary standards. Therefore, we feel certainly looking at sweep in its transactional aspect of cash and motion, it's totally appropriate and aligned. I can't really comment on what's taking place with the wirehouses. I don't understand it.... All I know is what we do from that standpoint and all the actions we have taken to ensure that the money is in sweep is really for transactional purposes.... Our rates are competitive, and we keep the appropriate level of cash that we think is necessary to operate. [O]bviously, we'll evaluate things as [they] go, but ... looking at what we have today, we think it's totally appropriate."
Asked how much client cash is held in "wrap advisory accounts," Berman says, "It's about $12 billion." He responds to another question, "I think our total cash is about $80 billion to $81 billion. In money markets and in third-party CDs, [it] is about $40-odd billion. And we are seeing that certainly money is still coming into ... money markets ... but it's slowed a little on the CD side. So from that standpoint, ... we are seeing less in CDs and there is a shift. People are staying shorter from that standpoint, as they're trying to take advantage of the yield curve."
Brennan Hawken of UBS comments, "[I'm] curious to drill down a little bit on the $12 billion of sweep within advisory accounts. Do you know what portion of that $12 billion would include Ameriprise as a fiduciary or investment advisor? A little more specifically, what portion of that $12 billion would be in the employee channel and in any portfolios where Ameriprise with centrally managed or central models where Ameriprise is the advisor?" Ameriprise CEO Jim Cracchiolo answers, "A lot of our central models are really run by outside managers, institutional and oversight is there. So ... even in those type of models, it's roughly around 2% or so. And even in our advisor discretion, it's actually less than on the institutional models. So I would probably say as you look at it. Now we haven't broken that out between employee, nonemployee, et cetera, because these models are all run in certain ways. But it is, as Walter said, a very low balance. It's what 2% or so, and there is constant trading activity, fees being pulled, the foreign taxes being paid, things like that.... If there's any higher balance, whether institutional or otherwise, they are moved into money markets and other short-duration products as well. So that's how we look at it and manage it, and that has been appropriate. We disclosed that very clearly. And from a clients and a legal perspective, we feel very comfortable with what that is."
Analyst Michael Cyprys of Morgan Stanley asks, "I Just wanted to circle back to the cash fee commentary, just hoping you could clarify for us how and to what extent are advisors compensated on cash sweep balances? More broadly, ... how you do see the scope over time for the way customers pay for services to evolve and potentially over time move away from sweep? ... What are other ways that customers could pay for services?" Cracchiolo answers, "You have transactional activity ... so there's always a certain low level of cash. Now what we really do is monitor and if cash is in any account at a larger level, ... we really look for it to be moved.... They invest in a lot of cash instruments, money markets, CDs, various other short-term duration ... and actually, the sweep actually went lower rather than increase. So that's the same thing in all of the wrap and institutional. Now within that, if there is more money sitting in that count, we don't want that cash to be a high balance even if it's invested out because that's not the purpose of the wrap account. But in so doing, if there is positional cash and they're in earning instruments, then the advisors do get paid.... But again, that's something that's monitored and we feel very comfortable with.... As far as the future is concerned, there's always adjustments that will occur in pricing and what you would have to do to offset some of the cost of your services that we will constantly look at. But if you're asking in the near term, we feel very good about where that is right now. We're not exactly sure what some of the changes that some people are bringing in [are or] for what reasons. So I'm not sure that was as clear as it maybe to you, but it wasn't to us."
During Raymond James Financial's call, CEO Paul Reilly comments, "Total clients' domestic sweep and enhanced savings program balances ended the quarter at $56.4 billion, down 3% from March of 2024. We are pleased to see cash balances remain relatively flat in the quarter following fee billings paid in April." CFO Paul Shoukry states, "Clients' domestic cash sweep and enhanced saving program balances ended the quarter at $56.4 billion, down 3% compared to the preceding quarter and representing 4.3% of domestic ... client assets. So far in the fiscal fourth quarter, domestic cash sweep balances have declined about $1.25 billion, as cash inflows have partially offset quarterly fee billings of approximately $1.5 billion."
During their Q&A, Shoukry states, "People are talking about, 'Well, what's the difference to this program, that program?' Our sweep programs are very, very different.... If you look at our sweep programs, we offer from 25 to 300 basis points. The programs that people have been talking about offer one basis point to 50 basis points. So we start off with a whole different value proposition. We have $3 million of FDIC per individual or $6 million joint in the sweep. We have also in our programs, very competitive money market funds or institutional classes available to everyone irrespective of the size of investments, and you can see how those have grown dramatically. We have an enhanced savings program ... offering high rates and up to $50 million of FDIC insurance, which you've also seen grow. And our advisors and clients, if you look at the shift, have taken appropriate actions to invest the money. So I don't know what's happening in some of the other programs. I can tell you ours are well thought through; we think they're very compliant."
He adds, "We've prided ourselves, subject to criticism from this [analyst] group ... for having such high sweep rates. But we've done it because we believe both it's the right thing to do, and it's regulatory ... compliant.... So we're going to have to look at movements and each of the movements have been a little different. We don't know totally what they apply to. [`W]e don't see anything that we know of today that's forcing us to change rates, but we meet weekly and we're going to be competitive. So if the competitive landscape of rates change, we have to be competitive both for our advisors and our clients.... If things happen, we're going to adjust. But as of today, we're looking at stuff, but with no current plans."
Asked again about advisory cash rates and, "What percentage of fee-based accounts is in cash at the kind of the lowest rates?" Reilly responds, "So if you look at our advisory sweeps, we'll just focus on those, about 2.5% of those assets are in cash, and to us that's frictional cash. You can't find an institutional portfolio or anyone that doesn't have some cash in it at those levels for trading, for paying fees, for whatever you do in them. So we view that as frictional or spending cash. The average cash amount in those accounts are $8,900.... I don't know where you go to a bank and get kind of our sweep rates at that amount of cash. So the other thing, if you look at those accounts and you can tell the shift, because before rates started moving, it was just cash in those accounts.... The money markets, CDs, and Treasuries combined are $22,600 in those accounts. So you can see it's much more invested, certainly on higher-yield instruments.... So, we think it's, you know, we're putting clients money to work with those numbers."
Reilly also comments, "If there was a squeeze on cash in the industry, where would you get the cash? You would offer higher rates to get it out of Treasuries and money market funds and whatever. I think that cash has seemed to have stabilized pretty much everywhere, or it's starting to anyway. Who knows where that goes? We have a very clear buffer still for operating our business. But I think a demand for cash or if rates go up, you start to see that ... pressure. But if rates go down and there's plenty of cash, I don't see what really squeezes that outside of following the market as rates fall. So I don't see anything else barring some unusual thing in the industry."
Another analyst asked about "third-party bank sweep yields falling by 18 basis points sequentially and about 25 basis points over the last two quarters." Shoukry replies, "A lot of that is initiatives that we run where we offer kind of a higher rate for new cash that comes into the sweep program to the firm and/or maturities from money market funds, Treasuries, and those type of things where clients want the functionality of the sweep program, but want a comparable rate to move over and benefit from the FDIC insurance and the availability of the cash in the sweep program. So as we've kind of implemented those initiatives, we've been able to effectively bring over cash from those sources through the quarter, which while it increases the average cost of the funding, it increases also the amount of funding that we have and it's still net attractive. So it's really a win-win-win initiative that we've put into place in the sweep programs.... I think now it's roughly somewhere in the 15% to 20% range of the total sweep balances that are in those type of programs."
Commenting on sweep rates, Shoukry says, "So our grid starts ... from 25 basis points and goes all the way up to 3% on the cash sweep program. There has been some migration and mix shift to the higher yielding programs and initiatives that we've offered, which are actually closer to 5%." On deposit betas, he adds, "It'll largely depend on the competitive environment. But because we have been generous in passing rates to clients and through these other programs that have near money market fund rates like Enhanced Savings Program, etc., we should have a lot of sensitivity to the downside as well in both the asset and on the funding side of things. So, we do feel like we have an ample amount of cushion. But again, it'll depend on the competitive environment and the demand for cash across the industry as rates go down."
Finally, he adds, "We continue to believe that we're closer to the end of the sorting cycle than the beginning. And some of the metrics that Paul discussed just in the fee-based accounts, having $8,900 of cash sweeps per account, whereas we have $22,600 of money market funds, CDs and Treasuries. A lot of these clients, to the extent they had investable cash balances, have been invested in the higher yielding alternatives. As we've always said since the very beginning, and we're one of the first, if not the first, to say it, we're not going to declare the end of the trend until we have several quarters of history to look back on and start seeing growth in the cash balances. And ultimately, that growth will come from the stabilization of the runoff and the migration and the ... continued growth ... of client assets. And as we retain, recruit advisors and those advisors bring on more client assets, there'll be cash associated with that, and that ultimately will drive the growth and the balances." (See also, Barron's "Raymond James Stock Jumps After Earnings. The Focus Is on Sweep Accounts.")
