Some of the largest US wealth managers are opening their doors to cannabis stocks, but it's still tricky for advisers to make recommendations

Samantha Lee/Business Insider

Some US wealth managers have set up processes to allow financial advisers to invest on clients' behalf in certain cannabis stocks.

• The burgeoning legal cannabis industry has seen a surge in IPOs and dealmaking. But financial advisers at some of the largest US wealth managers haven't been permitted to allow their clients to buy and sell cannabis stocks - until recently.
• Business Insider has learned that some of the biggest wealth management firms in the US - including Morgan Stanley, Bank of America, and Wells Fargo - have set up processes to allow financial advisers to invest on clients' behalf in certain Canadian cannabis stocks.
• In some cases, advisers at some of those firms can't make the investment unless clients ask first. In others, advisers must get the firm's pre-approval to make such a recommendation, and a decision is made on a case-by-case basis.
• Visit BI Prime for more stories, and subscribe here for our weekly cannabis newsletter, Cultivated.

Financial advisers at some of the biggest US wealth managers are slowly opening their doors to cannabis.

Wealth management firms including Wells Fargo, Merrill Lynch, and Morgan Stanley have started permitting their clients to access some Canadian cannabis stocks, Business Insider has learned. In some cases across these firms, the client has to come to their adviser to ask about an investment, or the adviser has to seek approval from the firm before making a recommendation.

The changes have come in recent months. Wells Fargo Advisors in August changed how it responds to client queries about cannabis investments, while Merrill Lynch started allowing recommendations of cannabis shares with "buy" ratings after Bank of America launched research coverage on a group of cannabis companies in April.

This shift underscores an evolving, still-complex environment for the intersection of cannabis and Wall Street. THC, the chief psychoactive component of cannabis, is federally illegal in the US. Yet there's been an influx of family office and venture capital investment into parts of the industry, and Wall Street's largest banks are starting to figure out how to serve cannabis-related companies. Eleven states and Washington, DC have now legalized marijuana for recreational use.

Wells Fargo Advisors now allows full-service financial advisers' clients to invest in six pre-approved Canadian cannabis companies if the clients specifically request first, according to a person with direct knowledge of the matter. Canada legalized recreational cannabis in 2018.

The six companies all confine their THC-touching operations to Canada and other jurisdictions where it is federally legal and are listed on major US exchanges like the New York Stock Exchange or NASDAQ. That leaves US cannabis companies - listed on the Canadian Securities Exchange or traded over-the-counter - off the table.

And Wells Fargo's financial advisers are not allowed to solicit the investment - the client has to ask.

The change to the policy came in August over what the person said was an uptick in demand from clients. The broader San Francisco-based bank also has a working group within its compliance department developing its approach to cannabis.

Merrill Lynch, Bank of America's wealth management unit, began allowing financial advisers to invest in a select number of Canadian-listed cannabis stocks on behalf of clients after Bank of America's sell-side research arm launched sector coverage in April. Advisers can recommend buy-rated stocks to clients - and execute transactions in the other names on behalf of clients if clients make the request, according to a person familiar with the matter.

That recommendation based on buy ratings typically goes for any sector the firm begins covering and is not unique to the cannabis space. The firm also takes into consideration where the stock is listed prior to allowing its clients to gain exposure, as it does with other sectors.

Merrill Lynch covers six Canadian cannabis firms: Hexo Corp, Canopy Growth, Aurora Cannabis, Supreme Cannabis, Cronos Group, and the Green Organic Dutchman. Cronos is the only name that currently has a "buy" rating from the firm; the other five have "neutral" or "underperform" ratings.

Advisers would not typically recommend a stock - cannabis or otherwise - that the firm's analysts haven't rated as "buy." But if clients persist, their advisers can ultimately allow them to go through with the investment.

And Morgan Stanley financial advisers have been responding to client questions about cannabis on a case-by-case basis, a source familiar with the matter said, which has allowed for investments in some Canadian-listed cannabis stocks.

Like other firms, it has been monitoring the evolving legal and regulatory landscape when it comes to cannabis and cannabis-related companies and investments, this person said. Morgan Stanley advisers can make those investments for clients if the request comes unsolicited from the client or comes as an adviser recommendation that has been pre-approved by the firm.

Expanding investment community

Most public US cannabis companies, like MedMen Enterprises or Curaleaf, are listed on the Canadian Securities Exchange - a secondary exchange in Canada with less stringent rules than the TSX, for instance - and traded over-the-counter in the US.

Some of the bigger Canadian names are listed on US major exchanges, including Tilray, Canopy Growth, and Aurora Cannabis. Discount brokerages, like TD Ameritrade, offer these names on their platform and you can also purchase shares on stock-trading apps like Robinhood.

Many cannabis stocks are thinly traded and highly volatile. They're dominated by retail investors because of the difficulty institutions have in accessing most of these stocks and the levels of risk that the not-quite-yet-legal sector presents.

Financial institutions and advisers "should take notice" given the cannabis industry's size and growth estimates, wrote Greg O'Gara, a senior research analyst in research firm Aite Group's wealth management practice, in a report earlier this month.

"Over the last few years, the investment community has expanded to include single-family offices, institutions, asset management firms, and significant corporate entities," he wrote, pointing to asset management giants BlackRock and Vanguard now holding the largest percentage stakes in Innovative Industrial Properties, a California-based company listed on the New York Stock Exchange that buys real estate focused on cannabis-related business.

But O'Gara said in an interview he believes it would ultimately take the passage of a federal legalization law for the largest financial services firms to fully embrace cannabis investments on behalf of clients.

Still, it's clear that many investors want in. Three-quarters of high-net-worth retail investors in the US and Canada indicated they want to invest in cannabis companies despite the recent headwinds in the sector, according to a recent survey of 660 investors conducted by FTI Consulting.

Shayanne Gal/Business Insider

Evolving landscape

Wall Street's largest banks are starting to figure out how to develop relationships within the nascent - but expanding - industry in a bid for first-mover advantage if or when US federal law prompts the market to open up. JPMorgan and Goldman Sachs have helped existing clients with cannabis-related deals, though their clients don't sell or cultivate THC themselves.

Congress is working on legislation to facilitate banking access to the burgeoning industry. But the SAFE Banking Act - which recently passed the House and faces an uphill battle in the Senate - does not apply to broader capital markets activity like investment banking or custodian services as written.

It's confined, rather, to simple commercial banking transactions like opening checking accounts and credit lines for cannabis companies in states where recreational use is legal.

Like many emerging industries, volatility has plagued the cannabis industry both in the US and Canada. US cannabis companies like MedMen have recently pulled out of near billion-dollar deals. And Curaleaf, the largest cannabis company in the US by revenue, said it was forced to reprice a deal "due to changes in market conditions" last week.

Regulatory uncertainty, spurred by the US vaping crisis in recent months, has sent many of the large stocks in the space down 52-week lows.

The sector has also suffered from severe capital markets constraints, lower-than-expected revenue from retail sales in Canada and large states like California, and what some experts say is the slowed progress of US legalization.