Bank stocks are not the only ones that have been hammered over the last week; a number of wealth management firms and brokerages are experiencing significant declines in their share prices, even those not attached to banks.
The collapse last week of Silicon Valley Bank and Signature Bank led to a significant market sell-off of bank stocks, catching even Charles Schwab in the contagion before it rebounded Tuesday. But investor concern is now bleeding into the wealth management space, with LPL Financial down 23% over the past five days. Raymond James Financial is off nearly 18% over the same time period; Ameriprise Financial declined nearly 17%; and Stifel Financial is down nearly 16%. Even Envestnet, a fintech company serving the advisor market, has seen its stock tumble 12% over that period.
But analysts agree the wealth management firms are meaningfully different from SVB, and that these businesses are healthy.
Michael Wong, sector director at Morningstar, who covers LPL, wrote in an analyst note that it would be difficult to have a “run on the bank” for wealth management firms.
“The banks associated with wealth management firms have accounts primarily with individuals and not companies, so most deposit balances are covered by the Federal Deposit Insurance Corporation,” he wrote.
Of the wealth management firms covered by Morningstar, 70% to 80% of their deposits are covered by the FDIC, while less than 20% of deposits at SVB were covered.
“It would also be difficult for financial advisors to quickly transfer their business and client assets to another firm, as they would have to find a company that’s a good fit for them and convince their clients to move, which could take weeks or months,” Wong wrote.
Speaking on CNBC, Devin Ryan, director of financial technology research and head of business development at JMP Securities, who covers LPL and Raymond James, among others, said most wealth management firms benefit from higher interest rates, and rates are cooling off a bit. Most of these firms are well capitalized and don’t have an asset/liability mismatch.
Ryan recommended investing in firms with strong financials, like Goldman Sachs, which he expects will be a market share winner. In the midcap space, he likes Stifel.
Larry Roth, managing partner at RLR Strategic Partners and executive chairman of Binah Capital Group, also said the declines are being driven by the possibility of lower interest rates sooner and people just starting to discount that in their valuation models. He expects the pain to be temporary.
“Even though the companies are all very healthy, LPL included, those that are participating in sweep balances in client accounts, people are worried that this bank problem is going to cause the Fed to stop raising rates and maybe even lower rates faster when they do lower rates,” he said. “So I think it’s just a reflection of people doing a net present value calculation against what could be a reduction in interest rates.”
“It’s not a reflection of the quality of the firms at all,” he added.
Scott Smith, director of advice relationships at Cerulli Associates, said it’s more likely investors are simply overreacting in the short term to the banking collapses, than interest rate shock. We’ve gone from having zero interest rates to having rates in general, and that’s bumped up these companies’ revenue significantly over the last 12 to 18 months.
“We’ve been so used to them being near zero for the last 10 years that I don’t think it should be that much of a shock to anybody that they start to cool a little bit,” Smith said.
He’s not particularly worried about the wealth management sector; the recent volatility in those stocks are tied to investors’ irrational worries about the financial sector in general, and these companies are simply getting more attention because of it.
“It’s going to cause some short-term pain, but if we look back, we’ve had pretty smooth sailing since 2009 when it comes to this stuff.”
Surinder Thind, senior vice president of equity research at Jefferies, said what is likely impacting Envestnet’s stock price is the overall deterioration in the outlook for the macro environment and concerns that the company’s flows could be impacted by market sentiment. When investors are fearful about the markets, they are less likely to be allocating to their portfolios. And with more than 100,000 advisors using Envestnet’s platform, the company has broad market exposure.
“The stock itself goes down because investors think growth is going to go down. Why would growth go down? Growth would potentially go down because consumers are fearful,” Thind said. “People don’t like to allocate money—especially retail—when there’s general fear about the market might be in decline.”
Thind projects the company to see around a 6% growth rate in flows this year, and he’s not changing his projections given recent events.
“If that was my projection prior to all of this, then what the market is assuming that existing projections that are out there will need to come down,” he said. “I’m not saying my projections are going to come down.”