client meeting

An ongoing shift of client assets from the brokerage business to the advisory side will help shore up investment firms’ revenues and profits, says Fitch Ratings.

In a new report, the rating agency said that solid results in the wealth management business are helping to offset weaknesses in other areas of the U.S. retail brokerage sector, including capital markets and asset management.

Fitch noted that a continued migration of assets away from brokerage and towards the advisory business “will stabilize margins and earnings for retail brokers and wealth management firms over time.”

A proposed rule from the U.S. Department of Labor (DOL), which would extend fiduciary requirements to more areas of retirement advice, should help entrench this movement of assets towards advisory businesses, the report suggested.

“Should the DOL’s rule become final, it would lead to increased regulatory and compliance costs and could further accelerate the shift from brokerage to advisory,” said Tana Marcom, director at Fitch, in the report.

Additionally, the firm noted that, for the first time in two years, brokers are seeing growth in client cash balances.

“Firms believe they have been able to retain the cash within their respective ecosystems as clients have taken advantage of higher yielding investments on offer since the rate rising cycle began, including money market funds,” Marcom said.

Additionally, the industry’s appetite for consolidation should “stay healthy in 2024,” Fitch said, as firms seek to bulk up.

“This could lead to many firms continuing to tap the debt markets to help fund M&A, which will weaken leverage and coverage metrics until synergies are realized,” it added.