The still-strong demand for financial advice underpins a stable outlook for the U.S. retail brokerage sector in the coming year, according to Moody’s Ratings.
In a report released this week, the rating agency said it expects the sector to perform well in 2025, powered by continued growth in client assets, which will boost fee and commission revenue.
“For retail and independent brokers, the outlook is stable, which reflects the enduring demand for advice and the companies’ flexible compensation structures,” it said.
However, some of this strength will be offset by declining interest rates, which will reduce firms’ net interest revenues and their elevated leverage positions.
“These firms will continue to scale up as the sector consolidates, and strong demand for a full range of financial advice will support their organic asset and revenue growth,” the report said.
However, Moody’s noted that the rates paid on brokers’ cash sweep programs has come under increased scrutiny, following regulatory inquiries and legal actions. Last month, a couple of large brokers settled enforcement actions involving their cash sweep practices. (Cash sweep programs automatically collect clients’ uninvested cash balances, allowing investors to generate a return on those holdings until they are invested.)
“We believe this increased attention is credit negative for independent wealth managers because it could lower their spread-based revenue earned on clients’ uninvested cash balances and increase legal and regulatory compliance costs,” Moody’s said.
Alongside the outlook for retail brokers, Moody’s said it has a positive outlook on U.S. boutique investment banks, exchanges, trading venues and clearing firms.
“Market makers and investment bank boutiques will benefit from high market volatility and robust flows in 2025,” the report said. “With high volumes and spikes in volatility likely in 2025, we expect robust market activity to provide strong trading opportunities.”
At the same time, strong markets are expected to boost securities issuance activity, driving higher advisory and underwriting fees, it noted.
“All sectors remain cyclical and sensitive to sentiment — with market turns that can reduce market valuations, volumes and volatility, temporarily drying up fee streams and customer flows. They are also sensitive to regulatory and market structure changes and evolving competitive dynamics,” the report said.
“However, we expect favourable operating conditions that support these companies’ earnings in 2025, and they also have various levers to navigate cycles and defend their credit quality, including strong and diversified profitability, flexible expense bases, proactive risk management and prudent liquidity,” it added.