Spread revenue: the hidden profit booster

Aside from direct fees, wealth and asset management firms profit from spreads—the difference between what they pay and what they charge. Unlike one-time fees, spreads provide a consistent revenue stream that can grow significantly with scale.

Interest rate spread: profiting from lending and deposits

👉 What it is: The difference between the interest rate firms charge on loans (such as margin loans) and the interest they pay to clients on cash balances.

👉 How it works:

• A firm lends money to clients for margin trading at 6% interest while offering just 2% on client cash deposits, capturing a 4% spread.

• Some firms provide high-yield savings accounts, but the rate they pay clients is often much lower than the interest they earn on investments.

👉 Why it matters:

• This spread is a major revenue driver for brokerage firms, investment banks, and wealth management firms that offer cash management accounts.

• During periods of high interest rates, these spreads widen, boosting profits.

Bid-ask spread: making money on every trade

👉 What it is: The difference between the price at which securities are bought (bid) and sold (ask).

👉 How it works:

• A market maker might buy a stock for $100 (bid price) and sell it for $100.05 (ask price).

• While this $0.05 per share seems small, multiply that by millions of trades per day, and it becomes a massive revenue stream.

👉 Why it matters:

• Firms engaged in market making or proprietary trading benefit the most.

• High-frequency trading (HFT) firms use advanced algorithms to profit from tiny bid-ask spreads at scale.

Foreign exchange (FX) spread: profiting from currency conversions

👉 What it is: The difference between the buying and selling price of foreign currencies.

👉 How it works:

• A firm offers to exchange USD for EUR at 1.1200 and to sell EUR for USD at 1.1250, capturing a 0.0050 spread.

• The larger the transaction, the bigger the profit—especially for firms handling international wealth management clients.

👉 Why it matters:

• FX spreads widen during market volatility, making them more lucrative.

• Banks, brokers, and wealth managers offering multi-currency accounts earn consistent income this way.

Fixed-income spread: capturing the difference in bond yields

👉 What it is: The spread between the yield earned on bonds and the cost of financing those bonds.

👉 How it works:

• A firm buys a corporate bond yielding 5% but finances it at a borrowing rate of 3%, capturing a 2% spread.

• In structured bond portfolios, firms blend high-yield and low-yield assets to optimize profits.

👉 Why it matters:

• This spread is a major income source for bond funds, fixed-income ETFs, and institutional asset managers.

• When interest rates rise, firms adjust their bond portfolios to maintain spread profitability.

Securities lending spread: turning idle assets into income

👉 What it is: The profit made by lending out securities while paying a lower rebate on collateral.

👉 How it works:

• A firm lends stocks to short sellers at a 2% lending fee but only pays 0.5% rebate on the cash collateral received.

• The 1.5% net spread becomes a revenue stream, particularly for funds with large holdings.

👉 Why it matters:

• Index funds and ETFs benefit significantly, since they hold vast amounts of securities.

• This revenue is often shared with fund investors, reducing expense ratios.

Structured products spread: building investments with hidden margins

👉 What it is: The margin firms earn when selling structured products (like structured notes and principal-protected investments) at a markup.

👉 How it works:

• A firm creates a structured note that costs $950 per unit to construct but sells it to clients for $1,000 per unit—capturing a $50 spread per note.

• The structured product may include derivative components, allowing firms to hedge risk while maintaining the spread.

👉 Why it matters:

• Private banks and wealth managers heavily promote structured products because of these built-in spreads.

• The complexity of structured products makes fees less transparent, increasing firm profitability.

Money market spread: profiting from cash-like investments

👉 What it is: The difference between what firms earn on short-term investments and what they pay investors.

👉 How it works:

• A money market fund earns 2% on T-bills but only pays investors 1.5%, capturing a 0.5% spread.

• Brokers offering cash sweep accounts invest idle client cash in money market funds and keep a percentage of the returns.

👉 Why it matters:

• Low-risk, stable revenue for firms managing high-cash-balance accounts.

• Spreads widen when interest rates rise, increasing profits.

Spread on private equity and venture capital: capturing outperformance

👉 What it is: The difference between the returns generated from private investments and the required return promised to investors.

👉 How it works:

• A private equity firm delivers a 20% return but only needs to pay investors 15%, keeping a 5% spread.

• This is separate from carried interest (performance fees) but complements overall profitability.

👉 Why it matters:

• Private equity and venture capital firms rely on this spread for long-term wealth creation.

• Spread profits are unlocked at exit events like IPOs or acquisitions.

Spread on credit products: high-net-worth lending profits

👉 What it is: The difference between the interest charged to clients and the cost of funds used to issue loans.

👉 How it works:

• A wealth management firm charges 5% on private loans but funds them at 2%, earning a 3% spread.

• These credit products include securities-backed lending (SBL), mortgages, and lines of credit.

👉 Why it matters:

• Private banks and wealth managers cater to ultra-high-net-worth clients who borrow against their portfolios.

• Lending spreads provide consistent revenue regardless of stock market fluctuations.

Spread on alternative investments: profiting from niche assets

👉 What it is: Earning a spread between investment returns and investor payouts on alternative assets.

👉 How it works:

• A firm invests in real estate yielding 8% but only needs to pay investors 6%, keeping a 2% spread.

• This applies to real estate funds, infrastructure investments, commodities, and even collectibles.

👉 Why it matters:

• Alternative investments are growing as investors seek diversification.

• Firms can charge higher fees due to the complexity and exclusivity of these assets.

Final takeaway: why spread revenue matters

Spread revenue is one of the most powerful and consistent ways for wealth and asset management firms to generate profits. Unlike traditional fees, spreads:

✅ Scale effortlessly—as assets and transactions grow, so do profits.

✅ Operate behind the scenes—investors often don’t notice them.

✅ Work in any market—even in downturns, spreads on lending and fixed-income assets keep revenue flowing.

Understanding these spread revenue models helps you make smarter investment decisions and avoid unnecessary costs.

Now that you know how these firms make money, you can invest smarter and maximize your financial future!