Bank stocks aren’t the only ones to take a hit over the past week; A number of wealth management firms and brokerage firms are seeing significant declines in their share prices, even those not affiliated with banks.
The collapse of Silicon Valley Bank and Signature Bank last week led to a significant rebound Bank stock market sell-offeven catch Charles Schwab in the contagion before recovering on Tuesday. But investor concerns are now spreading across wealth management, with LPL Financial down 23% over the past five days. Raymond James Financial is down nearly 18% over the same period; Ameriprise Financial declined almost 17%; and Stifel Financial is down almost 16%. Even Envestnet, a fintech company serving the advisor market, saw its share price fall 12% over the period.
However, analysts agree that the wealth management firms differ significantly from SVB and that these companies are healthy.
Michael Wong, sector director at Morningstar, which 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 rather than corporations, so most deposits are covered by the Federal Deposit Insurance Corporation,” he wrote.
Of the money management firms covered by Morningstar, 70% to 80% of their deposits are covered by the FDIC, while less than 20% of deposits with 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 would be a good fit for them and convince their clients, 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 oversees LPL and Raymond James, among others, said most money management firms are benefiting from higher interest rates and interest rates are cooling somewhat. Most of these companies are well capitalized and have no asset/liability mismatch.
Ryan recommended investing in companies with strong financials like Goldman Sachs, which he expects to gain market share. In the mid-cap 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 earlier lower interest rates and people are just beginning to factor that into their valuation models. He assumes the pain is temporary.
“Although the companies are all very healthy, including LPL, those who participate in sweeping customer account balances, people are concerned that this banking issue will prompt the Fed to halt raising rates and potentially cut rates even more quickly if.” they do lower interest rates,” he said. “So I think it’s just a reflection of people doing a NPV calculation against a possible rate cut.”
“It doesn’t reflect the quality of the companies at all,” he added.
Scott Smith, director of advisory relationships at Cerulli Associates, said investors are more likely to simply overreact in the short term than to the interest rate shock. We’ve gone from zero interest rates to interest rates in general, and that’s significantly boosted these companies’ earnings over the last 12 to 18 months.
“We’ve gotten so used to them being close to zero over the past 10 years that I don’t think it should surprise anyone so much that they’re starting to cool off a little bit,” Smith said.
He’s not particularly worried about the wealth management sector; The recent volatility in these stocks is tied to investors’ irrational concerns about the financial sector in general, and these companies are simply getting more attention because of it.
“It’s going to cause short-term pain, but looking back we’ve sailed pretty smoothly since 2009 when it comes to these things.”
