Ratings firms foresee earnings and credit challenges across wealth space, though some might be able to benefit
Wealth management firms will be tested as they take a staggering blow to earnings from the coronavirus crisis. But some may be able to take advantage of opportunities that arise as highly leveraged rivals become exposed.
That’s the word from ratings firms Moody’s and S&P Global Ratings, which earlier this month issued separate analyses on the possible impact of the pandemic.
In a report published on March 20, Moody’s analyst Fedi Abdel Massih said the fallout from the pandemic poses a “fundamental credit challenge” to most firms, particularly independent broker-dealers.
As reported by Financial Planning, Massih warned that “almost every single company in the securities and broker-dealer space” will be hit by the crisis. While the wealth management business as a whole is still attractive due to the recurring nature of advisory revenue, firms with stronger balance sheets and more solid credit ratings will use their positions to recruit advisors and snap up other firms.
“Some companies will be less flexible than others, and they might be ripe to be acquired by larger players,” he said.
Another report from S&P Global Ratings echoed the sentiment, warning that a one-two punch to the financial markets may leave smaller, more highly leveraged firms vulnerable to well-capitalized industry players.
The report, published March 18, saw “a major setback for U.S. retail brokers” as Fed rate cuts reduce cash sweeps and equity losses impact client assets. It estimated that firms will sustain a 25% to 50% decrease annual EBITDA amid the macroeconomic turbulence.
“[Some BDs] have already started implementing cost-cutting measures, but it is unlikely, in our view, that the mitigating measures could absorb the full scale of EBITDA likely losses,” S&P said, predicting a “central scenario” where their leverage and debt interest coverage will “deteriorate from 2019 to levels that may not be consistent with the current ratings.”
While large broker-dealers can fall back on their scale and infrastructure, S&P predicted that the deep cuts to their earnings will motivate them to press their advantage over smaller rivals.
There may be more attempts to by large firms to pirate talent amid the crisis, and some firms might find it harder to weather the storm than others. But according to Massih, financial advisors won’t necessarily abandon their ships.
“[D]uring volatile times, advisors tend to be cautious and not necessarily looking to change jobs,” he said.
