Altruist's release last month of an AI-driven tax manager may have been the event that sent many big brokerage firms' stocks into a tailspin in recent weeks, but that may be only the beginning.
Analysts warn there may be an even bigger artificial intelligence-related ticking time bomb for firms' basic business models. In a pair of its recent "Weekly Chu" notes — named for the analyst Steven Chubak — Wolfe Research noted anxieties that AI-driven money management could eat into the lucrative returns firms make from cash sitting in clients' brokerage accounts.
Using a procedure known as "cash sweeps," broker-dealers will often move such uninvested cash over to affiliated or unaffiliated banks to be lent out. The resulting profits — made from the difference between the interest they collect on loans and what they pay on brokerage cash — are significant.
But what if AI were able to move uninvested cash automatically out of sweeps and over to higher-yielding investments?
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The big business of 'cash sweeps' and the AI threat
Charles Schwab made $3.17 billion in net revenue from interest payments in the fourth quarter of last year. A large part of that came from clients' more than
Over the past two years, firms' sweeps policies have led to a series of lawsuits from clients who've argued
AI could put at least some of those lucrative returns in jeopardy, according to Wolfe Research.
"One key area of concern is that as AI improves efficiency of financial services and cash can move more efficiently across the system, there will be less need to hold cash in accounts, creating a headwind to cash sweep balances/revenues," the research firm remarked in a note from Feb. 16.
The market is aware of the risks. Shares of Charles Schwab, LPL Financial, Interactive Brokers and other brokerages that depend heavily on cash have been attached to a yo-yo string in recent weeks. The initial cause of the sell-offs was Altruist's introduction last month of a tax-planning feature within its Hazel AI assistant for financial advisors.
Altruist CEO Jason Wenk has made it clear that taxes are just the start. In an
"There'll be more agents doing more work that will continue to make advice better, more affordable and more accessible," Wenk said.
Tim Welsh, the president and founder of the wealth management consultant Nexus Strategy, said he sees a role for AI in helping investors make wiser use of uninvested cash.
"It's not that clients are dumb." Welsh said. "It's that it takes action. Or you just forget about it and don't realize you had that $500 that just sat there for a couple of months."
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What if AI agents could move cash around on their own?
Welsh said AI would be useful even if it did little more than send investors reminders about their uninvested cash. Money market funds — which invest in Treasuries and other debt securities — are often pitched as an attractive alternative to cash because of their often-higher returns. Schwab, for instance, now pays returns
Fintechs like Altruist are looking beyond simple prompts to advisors and their clients through the
"Obviously, you'd have to get regulators' permission to do that," Welsh said. "But that would really redefine the value proposition of these broker-dealers who really rely on cash harvesting as one of their main revenue sources."
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Brokerage firms respond
Brokerages haven't taken the perceived threats lying down. In the days after its stock took a hit, LPL announced that it was deepening its partnership with the AI giant Anthropic. LPL is working to provide its more than 30,000 advisors with various services related to wealth management, investment banking and equity research through Anthropic's Claude AI model.
Charles Schwab CEO Rick Wurster has also been making the media rounds with assurances about his firm's own investments in AI and predictions that most clients will always want to work with human advisors.
Peter Crane, the president of Crane Data and the publisher of the Money Fund Intelligence newsletter, said brokerages have proved their ability to weather big shifts in their business models before. Part of the reason so many firms have become so reliant on cash sweeps is that they needed a way to replace revenue lost when many ceased charging investors commission on stock trades.
"You can try to cut fees through legislation and other strategies, but you've got to pay for these services somehow," Crane said.
Wolfe Research likewise has few doubts about brokerage firms' bottom lines. In the same research note in which it noted fears of AI disruption, it also said firms could simply adopt "platform/custody fees," essentially user charges, to offset the losses. Wolfe's note expresses confidence that firms will always have a business in finding advisors for clients who prefer working with human beings — a desire that tends to increase with wealth.
"The more affluent the client base, the more complex client needs are, and the more value these clients place in having a strong relationship with an advisor," according to Wolfe Research. "Meanwhile, less affluent/younger clients may be more willing to leverage AI-enabled, lower-touch alternatives."
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How the tokenization of cash, other assets poses a further threat
The research firm meanwhile notes another possible threat to brokerages' cash-related income. The "tokenization" of financial assets like stocks and bonds could also be made to apply to cash holdings.
In general, tokens are a digital representation of an ownership claim in underlying assets — stocks, bond, gold, cash or conceivably anything else an investor can hold in a portfolio. Much like bitcoin and other cryptocurrencies, digital tokens are recorded on a blockchain system. Advocates of tokenized assets contend they offer benefits like increased liquidity, lower transaction costs and fast trade settlements.
Aaron Kaplan, the founder and CEO of the digital market provider Prometheum, agreed that tokenization could eventually reduce the roles of various middlemen ranging from traditional brokerage firms to the Depository Trust Company, or DTC, which helps settle securities transactions. All of these entities have record-keeping functions that could largely be replaced if trades move onto a blockchain ledger.
"In theory, certain intermediaries aren't as necessary in the process if the assets exist on chain," Kaplan said. "What's the role of the transfer agent? Yeah, right. And then the other thing is, if the asset exists on chain, and we're talking about a sort of more streamlined settlement process, is DTC necessary?"
Investors would benefit from having to pay less to every intermediary that has a hand in settling trades. But businesses would be faced with a loss of revenue.
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Brokerages always find a way
Kaplan, though, said he thinks the eventual move toward tokenization will open other lines of business for incumbent firms. Prometheum, for instance, is already helping wealth managers
"Now you can offer your customers access to these assets and go digital and build your digital business without necessarily having to do the major lift of creating everything yourself," Kaplan said.
Wolfe Research also thinks that traditional brokers will find a way to provide. A day could come when cash held in brokerage accounts is "tokenized" and automatically moved over to money market funds, rather than being lent out through cash sweeps, according to Wolfe Research.
Again, the remedy most likely lies in higher fees. Wolfe Research estimates firms could offset revenue losses from a 50% depletion of their cash-sweeps holdings merely by having clients pay a 0.04% (four basis points) fee on their total assets.
"While cash monetization fears will likely persist near term, we believe the wealth players should be able to significantly offset any potential hit to earnings," Wolfe Research wrote.
