- While many institutions feel they must broadly raise deposit rates on wealth savings products to compete, repricing the entire portfolio is not necessary.
- More targeted strategies to attract and retain deposits include a tier system based on the elasticity of a client’s specific portfolio.
- For clients with large and complex relationships, short-term exception pricing based on the client’s total assets can help keep deposits in house.
With the Federal Reserve unlikely to reduce short-term interest rates before summer, banks experiencing significant runoff of wealth deposits and cash sweeps have several options available beyond broad hikes in deposit rates to stop the bleeding and potentially regain share of wallet with their wealthiest clients.
While just 11% of wealth and money market savings deposits are being acquired for less than 200 basis points, nearly a quarter of portfolios are paying less than 200 bp, with 14% of that total under 10 bp (Figure 1). Cash sweeps are paying an average rate of 80 bp. It’s no wonder that wealth clients, with so many options to choose from, have moved money out of traditional deposit products.
Figure 1: Acquisition Rate vs. Portfolio Rate
Acquiring wealth savings/MMS balances generally requires higher rates to attract rate shoppers, while existing portfolio balances tend to be less rate-sensitive.
Money market funds have been paying over 500 bp for months, which helped this low-risk option grow 23% last year while wealth deposits and cash sweeps have declined by 7% and 23%, respectively. And once a client has moved their cash to one of these higher-yielding instruments, there’s really not much incentive to move it back.
While many banks may feel like their only option is to raise rates across the board on their savings and money market products and offer other incentives to drive deposit acquisition and balance growth, it’s not necessary to reprice the entire portfolio in order to compete.
Effective use of tier-based and exception pricing can save banks millions on interest expense while balancing the need to attract and retain deposits. But how does an institution determine which clients are content to keep their cash sitting idle at a lower rate and which are more likely to flee to online banks or money market funds to extract every last basis point of return?
The answer to this question is rooted in elasticity, the demand and responsiveness to changes in pricing based on a client’s intended use of the deposits.
For example, a client that uses a single provider for their full suite of financial services can be less likely to move their low-earning cash because they value the relationship they have with their advisor and like the convenience of a one-stop shop. A different client, however, may have money that they won’t need in the near future — “tomorrow” or “someday” money — that they’re willing to move to chase an incentive or higher yield.
Understanding client segments and elasticity is imperative to create a pricing strategy for wealth clients’ cash that balances risk, ease of access and profitability to the firm. As illustrated in Figure 1, acquisition balances generally are paid higher rates because wealth clients who are shopping are the most rate-sensitive. However, portfolio rates (paid to balances that are already in the savings/MMS product) can be less sensitive and are priced well below the acquisition rates.
As firms seek to balance acquisition and retention, the temptation to raise all rates to somewhere in the middle can lead to pricing in the “area of indifference” where rates aren’t high enough to attract new clients and dollars and may be high enough to curb runoff but do so at the expense of profitability (Figure 2).
Figure 2: Typical Deposit/Sweep Elasticity Of Demand
Pricing in the “area of indifference” may work to reduce runoff, but rates in this zone aren’t high enough to attract new clients and their dollars.
Wealth-deposit runoff bottomed out in May 2023 and has since rebounded. Firms that raised rates significantly across the portfolio to chase client cash likely did so at the expense of their bottom line. Two tactics, used in tandem, can help win and retain balances while minimizing interest expense.
First, it’s imperative to have a tiered rate structure in place. While many wealth clients expect pricing based on their total relationship, most institutions utilize tier-based pricing at the account level. At a minimum, a simple tier system can be devised that pays the lowest deposit rates for those accounts tied to the lowest relationship balances and moves progressively higher for more valuable relationships.
But to be more effective, a tier system should be based on the elasticity of the specific portfolio, which generally requires a level of granularity beyond a basic three- or four-tier strategy. A tiered structure should include published rates that define and show the benefits of holding more share of wallet with a firm (via higher rates for a deeper client relationship across investments, loans and deposits).
In order to stay in the consideration set, firms should offer competitive published rates in the lower tiers and rates in the upper-most tiers that allow room for relationship-based exception pricing for the most valuable clients (Figure 3).
Figure 3: Wealth Savings/MMS Rates
The gap between published and actual rates paid on Wealth Savings/MMS products has continued to grow this cycle.
For clients with large and complex relationships, possibly with cash spread across several accounts at a firm, exception pricing based on the client’s total assets is often the answer. For deposit acquisition, this exception pricing can be for short terms as a way to bring on AUM while advisors allocate across cash and investments. When used to retain at-risk balances, a firm might require that the client keep a minimum amount in their account for the exception period.
If exception pricing is fixed rather than variable and indexed (e.g., tied to the Fed Funds rate), firms should offer it for a shorter timeframe during flat and falling-rate cycles to retain the ability to reassess at an interval that suits the client’s desire to maximize their cash yield while minimizing the firm’s exposure should rates quickly decline.
In order to effectively use exception pricing, it’s necessary to understand a client’s intentions. Perhaps the greatest benefit of having such personalized service for wealth clients via their advisor is that no one should have to guess at how much a client intends to keep in cash for today and tomorrow, thus allowing for exception pricing to be used strategically across an advisor’s book. Utilizing minimum-deposit requirements and creating profitability thresholds that empower advisors to offer exception pricing up to a certain rate on cash balances without special approval will help them win and retain balances. After that, requiring approvals for steeper exceptions at different levels of leadership will help minimize risk and maintain profitability for the firm.
Whether rates are rising, holding steady at these historic highs and even when they start to fall, published rates for wealth clients remain significantly lower than booked rates. It’s important to understand the elasticity of balances and actual rates being paid across the industry to ensure that pricing discipline balances growth and margin. The one-on-one relationship that advisors have with their clients allows for a truly personalized experience not often available to retail bank clients.
