Wells Fargo set sweeps rate to mirror money markets

Wells Fargo is raising its "cash sweeps" rate on certain advisory accounts directly to keep pace with the yields now offered by money market funds.

Speaking on Tuesday at Barclays Global Financial Services Conference in New York, Wells Fargo Chief Financial Officer Michael Santomassimo responded to questions from Barclays analyst Jason Goldberg about why the firm had raised its rates on some advisory accounts to 5%. Santomassimo said the goal was to mirror yields now being offered by many money market funds.

At least one recent lawsuit takes Wells to task for previously paying as little as 0.05% on clients' uninvested cash.

"This was a very targeted change for sweep deposits," Santomassimo said. "So this is effectively mostly frictional cash that sits in advisory counts, and we align those rates with money fund rates. So it's very specific to this product, not other products."

"Cash sweeps" generally refers to firms' practice of taking clients' uninvested cash and moving it over to affiliated or unaffiliated banks, where it can be lent out or invested for relatively high returns. A recent rash of lawsuits has accused not only Wells Fargo but also Morgan Stanley, LPL Financial, Ameriprise, Bank of America's Merrill, UBS, Raymond James and Charles Schwab of keeping too much of these proceeds for themselves and not sharing enough with investors.

READ MORE:
Raymond James hit with second 'sweeps' lawsuit
JPMorgan, Raymond James join firms sued over cash sweeps
Suit: UBS' sweeps change is 'implicit admission' of wrongdoing
Cash sweeps legal avalanche hits Ameriprise, LPL with new suits
Regulatory scrutiny of 'cash sweeps' extends to Morgan Stanley

No firm has cited the legal filings as a reason for raising its rates. But many firms have nonetheless announced plans in recent months to increase their payouts on sweeps accounts.

'The right thing to do'

Wells Fargo was the first out of the gate in July when executives said during a second quarter earnings call that they expect their planned change to take a $350 million annual bite out of the firm's bottom line. Wells Fargo did not then say how much it would be raising its sweeps rates.

Still, many of the lawsuits filed against Wells and other firms have tried to make hay out of the fact that returns of 5% can be obtained simply by moving client cash into money market funds — a type of mutual fund that invests in short-term debt. Santomassimo made it clear Tuesday that Wells was using money markets as its benchmark.

"As we went through the process, we decided to move it more aligned to the money fund rates," Santomassimo said on Tuesday. "And we think that was the right thing to do."

Speaking at the same conference, Morgan Stanley co-president Daniel Simkowitz likewise expressed comfort with his firm's recent changes to its sweeps rates. Simkowitz's colleague, Chief Financial Officer Sharon Yeshaya, said in an earnings call in July that Morgan Stanley would be raising its sweeps rates on certain accounts. A spokesperson later confirmed reports that the firm is raising the rates in question to 2% for clients with $250,000 or more.

Morgan Stanley is also embroiled in its own court challenge over its sweeps policies. A suit filed in June unfavorably compares the rates the firm offers — ranging as low as 0.01% — with yields on money market funds.

But rather than say Morgan Stanley is trying to match money markets, Simkowitz contended Tuesday that the firm's sweeps changes are due to competition-related pressures. Simkowitz said Morgan Stanley noticed some wealth management clients reallocating their money in response to rates offered through its advisory services.

Simkowitz said Morgan Stanley isn't trying to compete purely on rates, "but we moved some of the rates on those advisory accounts."

"We feel very comfortable that that move in the context of the overall advisory proposition that we have with clients is in good shape," he said. "And so I think you heard that, and we're going to keep saying it over and over again. It's part of the package. But we feel pretty comfortable with the rate move that we made — that it's reasonable and it's defending our competitive position."

Lawyer: Higher rates don't fix past harm

Both UBS and Bank of America, with its Merrill wealth management arm, have also made recent adjustments to their sweeps rates. Some of the recent spate of lawsuits have cited those changes as "implicit admissions" that something was wrong with the previous payouts.

In an interview last week, one of the lead lawyers in the suits — Matt Dameron of Williams Dirks Dameron in Kansas City — said the rate increases do nothing to repair harm that has already been done.

"Our case is looking retrospective. We're looking into the past to try to get those damages," he said, adding that raising rates does nothing "to fix all the money that has been misallocated from our clients over the past several years."

Wealth management prospects

Simkowitz and Santomassimo meanwhile both expressed optimism about their firms' wealth management prospects. Simkowitz reemphasized Morgan Stanley CEO Ted Pick's sense that much of the firm's new wealth business will come through its workplace channel.

That channel, Morgan Stanley at Work, offers services ranging from helping businesses setting up 401(k) plans and equity compensation for employees to aiding CEOs and other executives in sales of their company's stock. Simkowitz said the unit has seen, in the past five years, more than sevenfold growth in the number of households it's working with.

The number started at roughly 2.5 million in 2019, when Morgan Stanley bought a company called Solium Capital and its Shareworks system used for managing equity compensation. It now stands at 19 million.

Simkowitz said Morgan Stanley has relationships with many businesses, and their CEOs in particular, through its investment banking arm.

"So if you combine wealth management capabilities in delivering financial wellness to an employee base or ultimately to the end consumer, as well as our relationship capabilities in the investment bank, we're now not just a capital advisor, a risk management advisor, an M&A advisor, but also a talent advisor to all these corporations," Simkowitz said.

Santomassimo in his remarks said Wells Fargo's wealth management business has been a bit of a turnaround tale. He acknowledged Wells struggled with retaining advisors following a series of scandals that had the firm under greater regulatory scrutiny.

Wells Fargo has stopped releasing official headcounts, but Santomassimo confirmed Tuesday that the number still hovers around the 12,000 advisors last reported in early 2023. Santomassimo noted Wells stands out among wirehouses for allowing wealth managers to join as independent contractors, which it does through a division known as FiNET. He called the independent business model "the fastest growing part of the wealth management business."

"The tide has turned," he said. "We're seeing good recruiting. We went from industry-leading in attrition to what we think is industry-leading in retention."