Unlike its competitors, RBC has no plans to change 'sweeps' rates

RBC has no plans to follow its rivals Morgan Stanley, Wells Fargo and UBS in raising yields on "cash sweeps."

Talking to analysts Wednesday about Royal Bank of Canada's third-quarter earnings, interim Chief Financial Officer Katherine Gibson noted the firm's U.S. wealth management arm is holding roughly $30 billion of clients' uninvested cash in so-called sweeps accounts. While many large wealth managers have been responding to recent regulatory and legal scrutiny by raising yields on these accounts, Gibson said RBC has no such plans.

Since the U.S. Federal Reserve started raising its target rate in 2022, "our pricing has been well above industry averages, particularly as it pertains to our largest wealth management relationship," Gibson said. "As such, we do not anticipate making any material changes to our pricing of advisory suite deposits."

She also noted that the bulk of the U.S. wealth arm's sweeps accounts are in what she called "non-advisory accounts." "Cash sweeps" refers to wealth managers' practice of moving clients' uninvested cash into banks, where it can either be lent out or invested. A recent rash of lawsuits accuses firms of keeping the lion's share of returns for themselves and letting too little flow back to investors.

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RBC's plan to hold steady on its sweeps rates comes in contrast to announcements made by Wells Fargo, Morgan Stanley and UBS that they all are raising their yields on certain accounts. All three of those firms are now faced with lawsuits arguing they provide too small a return to clients on their uninvested cash. Wells Fargo and Morgan Stanley have also said in regulatory filings that they are responding to Securities and Exchange Commission inquiries about their sweeps policies.

'The right balance'

Doug Guzman, RBC group head of wealth management and insurance, said on Wednesday's earnings call that the firm chose "some number of quarters ago" to raise its sweeps yields. That decision, he said, came largely in response to the U.S. Federal Reserve's rate-hiking campaign. The Fed raised its target interest rate 11 times from spring 2022 to 2023 in a bid to tame inflation, bringing it to a range of 5.25% to 5.5%.

Guzman said he and other executives thought that "the right balance was to allocate some of that rising rate to our customers." 

"So we have come into this period of discussion on this topic with rates that our clients are experiencing that are higher than our competition," he added. And so that leads to us obviously paying attention to this because it's getting a lot of attention. But to Katherine [Gibson]'s point, we don't feel like we need to make a big adjustment because we had already made that adjustment in our customers' favor some number of quarters ago."

RBC isn't the only firm expressing comfort with its sweeps rates. Executives at Raymond James, which was hit with two sweeps-related lawsuits this week, said in a recent earnings call that they are certain their policies comply with industry regulations.

U.S. earnings and income

RBC Wealth Management, the official name of the U.S. wealth arm, meanwhile reported that its revenues rose to $1.61 billion in the three months ending July 31, which it calls its third quarter. That figure was up 9% from the same period a year ago.

The increase, according to a report to shareholders, was "mainly due to higher fee-based client assets reflecting market appreciation and net sales."

"Furthermore, loans and deposits in our U.S. Wealth Management franchises reported strong year-over-year growth this quarter," Royal Bank CEO David McKay said in the call with analysts. "Our U.S. Wealth Management Advisory businesses are the second largest contributor to U.S. dollar results."

At the same time, RBC Wealth's expenses rose by 5% year over year to $1.42 billion. That increase was driven primarily by "higher variable compensation commensurate with increased commissionable revenue," according to an earnings report.

Deducted from the unit's revenue, that left RBC Wealth with $164 million in net income, a figure unchanged year over year. The unit's "efficiency ratio" — basically the percentage of its revenue eaten up by expenses — was at 88.4%, up 3.3 basis points from a year ago.

Assets under management and administration

RBC Wealth's fees were collected largely on $214 billion in assets under management, which were up by 15% year over year and 7% from the previous quarter. 

Its assets under administration — which includes clients' assets held for safekeeping and record-keeping purposes — came in at $648 billion in the third quarter. That figure was up 13% year over year and 6% from the previous quarter.

The overall wealth business

All of Royal Bank of Canada's wealth management businesses — including its Canadian and international units — reported net income of CA$862 million in the third quarter. 

"Wealth Management's earnings were up 30% from last year as market appreciation and net sales continue to drive strong performance in our wealth management advisory and asset management businesses," Gibson said in the call with analysts. "These factors were partly offset by higher variable compensation."

The wealth units' net income came on CA$4.77 billion in revenue, up 8% year over year. Total assets under management were at CA$1.29 trillion and assets under administration at CA$4.27 trillion. Those figures were up by 19% and 6% year over year, respectively..

RBC named a new chief of wealth management in July, turning to Neil McLaughlin, a longtime head of its combined banking division. McLaughlin is scheduled to take over the wealth unit on Sept. 1 from Guzman, who will become deputy chair and remain on the firm's executive leadership team.