Morgan Stanley last week raised the interest rate on cash held in investment advisory accounts to 3.6%, up from 2.2%, according to a note from Wolfe Research managing director Steven Chubak. The increase, reported Monday, marks a significant shift for the wirehouse, which had maintained lower rates for over two years amid regulatory scrutiny of cash sweep practices.
The move sent ripples through the wealth management sector. On Friday, Morgan Stanley shares fell 4% to $212.03, while LPL Financial Holdings Inc. dropped 3.1% to $268.75 and Stifel Financial Corp. declined 3.1% to $69.27. The selloff reflects investor concern that higher payouts to clients will compress the lucrative revenue stream firms earn from cash held in brokerage and advisory accounts.
Since early 2023, regulators have intensified scrutiny of how large firms compensate clients for uninvested cash. The broader market volatility has also put pressure on firms to offer competitive yields as clients seek better returns. Morgan Stanley’s new rate is now competitive with many high-yield money market funds, according to Chubak.
“A number of investors pointed out the 3.6% rate was competitive with some of the highest yielding money market funds, with some buy-siders deeming the 3.6% payout ‘unnecessarily high,’” Chubak wrote. He noted that the rate could weigh on the firm’s net interest income from cash sweep programs, a key profit center for wirehouses.
However, Chubak suggested the decision may be tied to Morgan Stanley’s broader strategy to fund trading activities. “While the deposit rate being offered is competitive with money market yields, one key difference between investment cash on balance sheet versus money market balances is that the former client cash that remains on balance sheet can be used to fund trading activities at the bank,” he wrote. The firm has made trading a priority, and retaining client cash on its books supports that goal.
The rate hike comes after a prolonged period of near-zero interest rates following the 2008 financial crisis and again during the COVID-19 pandemic, which decimated profits from cash sweep accounts. Since the Federal Reserve began raising rates in January 2022, firms have regained the ability to earn on client cash, but now face pressure to share those gains with clients.
Morgan Stanley declined to comment on the rate change. The wirehouse’s move could prompt other large firms to follow suit, potentially reshaping the competitive landscape for cash management. For advisors, the shift underscores the importance of monitoring how their firms handle client cash, especially as regulatory scrutiny persists.
In related developments, JPMorgan’s recent leadership changes highlight the ongoing evolution at major financial institutions. Meanwhile, recruiting activity remains robust as firms jockey for talent and assets.
