Shares of industry giants Morgan Stanley, Charles Schwab, and Raymond James Financial took a hit on Wednesday as concerns grew over their declining client assets amidst the backdrop of higher interest rates. Even though Morgan Stanley reported earnings that surpassed analyst expectations, weaknesses in investment banking and wealth management caused its stock to drop 6.8%. Raymond James Financial fell 4.6% and Charles Schwab slid 3.4%.
This stock rout occurred simultaneously with a broader decline in equity markets. Despite some wealth management companies, like Schwab and Morgan Stanley, reporting earnings that exceeded Wall Street forecasts, the combination of market downturns and rising interest rates prompted investors to sell off wealth management stocks. Devin Ryan, an analyst at JMP Securities, explains, “On days where markets drop significantly and interest rates rise, that is a backdrop where wealth management stocks are sold. It’s a double whammy on the business.”
As expected, market declines directly impact the assets managed by these firms, ultimately putting pressure on fee-based revenue. Furthermore, high interest rates have affected the earnings of wealth management companies. Increased interest expenses and the shift of uninvested cash from low-paying bank accounts to higher-paying options like money-market funds, which currently yield above 5%, have contributed to this challenge. Commonly referred to as cash sorting, this process has presented headwinds for Schwab and raised concerns among investors this year. “People are fixated on the interest-rate dynamics of these companies,” states Ryan.
In addition to these factors, some wealth managers’ stocks have also been affected by concerns about their other business lines, particularly in investment banking where M&A activity has declined. According to William Blair analyst Jeff Schmitt, “It’s a bloodbath out there.”
Despite these challenges, wealth management companies remain resilient and continue to navigate through the volatility of markets and shifting interest rates.
Wealth Management Companies Face Challenges Amidst Changing Market Conditions
Wealth management companies like Morgan Stanley, Charles Schwab, and Interactive Brokers are grappling with various challenges amidst changing market conditions. Morgan Stanley has seen a significant decline in its investment banking revenue, which fell by 27% year over year. However, the company’s wealth management unit reported a modest 5% increase in revenue. Despite this growth, the unit only managed to bring in $36 billion in net new assets, well below the rate seen in recent quarters.
One of the factors impacting Morgan Stanley’s performance is the high interest rates. The company’s clients have chosen to hold higher levels of cash due to these rates. In fact, CFO Sharon Yeshaya revealed that clients currently have 23% of their assets in cash, which is 5% higher than historical averages. While the company expects allocations to cash to decrease as rates come down, this process may take time as the Federal Reserve is not anticipated to start cutting rates until mid-2024.
Charles Schwab has its own set of challenges stemming from cash sorting issues. The company’s stock has experienced a significant decline of approximately 38% this year, particularly during the regional bank crisis in March. Although Schwab witnessed a rise in stock prices following better-than-expected earnings and signs of improvement in cash sorting, it fell alongside other wealth managers the following day.
Similar to Schwab, other wealth management companies also reported a sequential decline in assets. Schwab’s total assets as of September 30 amounted to $7.82 trillion, reflecting a 2% decrease from the previous quarter but an 18% increase from the same period last year.
Interactive Brokers faced a different set of challenges. Following their report of adjusted earnings per share of $1.55, up from $1.08, the discount brokerage firm observed a 4.1% decrease in its stock value. Despite this decline, the company experienced a surge in net revenue, which increased by 45% to $1.145 billion primarily due to a rise in net interest income.
As market conditions remain uncertain, analysts like Morningstar’s Michael Wong are closely monitoring these developments. Wong noted that if interest rates continue to remain at elevated levels for an extended period, wealth management companies like Interactive Brokers may maintain their earnings power. However, rapid rate cuts by the Federal Reserve could potentially put pressure on net interest income.
Overall, wealth management companies are navigating through various challenges brought on by changing market dynamics. It will be crucial for them to adapt and strategize effectively to thrive in this evolving landscape.
- Andrew Welsch