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Portfolio > Portfolio Construction > Investment Strategies

3 Sins Advisors Commit When Discussing Cash With Clients

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What You Need to Know

  • Cash is back in style, and advisors need to ensure they're speaking smartly to clients about it.
  • Advisors have insured deposit solutions available that offer higher rates than traditional banks and more FDIC insurance.

On the surface, cash appears to be one of the least controversial asset classes, and it’s usually not one that elicits strong feelings one way or the other among advisors.

That’s a good starting point, but the fact remains that there are some “sins” advisors can commit when it comes to sizable cash positions. Specifically, sins of awareness, substitution and self-preservation. 

After a couple of years of cash being essentially irrelevant, that script now has been flipped. Thanks to the Federal Reserve’s late arrival to the inflation-fighting party, which has kept its foot to the floor on the rate tightening pedal since mid-year and through its most recent meeting. These activities, on top of Chair Jerome Powell’s previous statements, have prepared us for sustained high rates likely into 2024. 

As such, the dollar is the world’s best-performing major currency this year, and cash is back in style. Those factors underscore the relevance of speaking smartly to clients about their cash, namely, their held-away cash that may be languishing in indifferent bank accounts outside of your purview, or worse yet, uninsured.

While cash may not be your forte or an asset class in which you put much focus, this held-away cash is an asset class that is deeply personal (and tangible) to your clients. It’s time to get deeply personal and speak with them about it. And when you do, here are some common pitfalls — nay, sins — to avoid. 

1. Lack of Awareness

The primary cash sin committed by many advisors is the sin of awareness. Which is to say they are committing it not realizing that there are options available to clients beyond CDs, money markets, and T-bills.

This is all perfectly good and practical as it relates to having cash on hand within clients’ managed portfolios. However, convincing a client to move deposits from their bank into a pooled investment such as a money market fund or taking on duration in a Treasury has proven to be a high barrier.

Advisors have insured deposit solutions available to them today that offer higher rates than traditional banks and 100 times more FDIC insurance (yes, 100 times!). For high-net-worth clients, this is a 101 class in potentially achieving a higher rate with less risk. 

Take it a step further. Suppose an ultra-high-net-worth client asks you for assistance in generating some yield on $10 million in cash. Getting a great rate is not that hard to come by.

But to get FDIC insurance in a traditional fashion would require the advisor to spread the client’s assets across a staggering 40 bank accounts. That’s burdensome and inefficient (think of all the monthly statements and 1099s).

Did you know this can be achieved through one simple account? Many don’t know it exists, yet hundreds of your peers already offer it to their clients. It’s good to be in the know. 

2. Substitution Issues

The next cash sin is the sin of substitution. Advisors need to avoid substituting short-term bonds or “cash-like” vehicles for cash. Those are fine investments for suitable clients as part of a fixed-income conversation. However, cash is intended to be a risk-free asset class.

By turning the conversation to bonds, even ultra-short-term ones, advisors introduce interest rate/duration, headline and principal risks to the equation. Never put yourself in a position to have to defend your cash recommendation. Anyone who had clients in short/ultra-short bond funds earlier this year learned that lesson well. 

3.  Prioritizing Self-Preservation

Finally, there’s the issue of self-preservation by way of the competition — and a ton of advisors are guilty of this. As is typical in a rising rate environment, many online banks and others come out of the woodwork and angle the glint directly into your clients’ eyes with competitive “teaser” deposit rates.

When clients ask you about getting a higher rate on their cash, do you do what so many others have done and send them to a third-party online bank?

These online savings accounts are offered by banks that are part of larger wealth management firms that compete directly with you. Why would you send your clients to the competition if you (recall the first sin of awareness) have immediate access to a cash solution that creates more value for HNW clients than any online bank could? 

According to a recent CNBC article highlighting comments from Goldman Sachs CEO David Solomon, “Now, rather than seeking to acquire customers on a mass scale for the business, Goldman will instead focus on the Marcus customers it already has.”

Overall, high-net-worth clients have a lot of cash typically held away from the advisor. By not addressing clients’ cash needs and punting to online banks, advisors are committing the most egregious of sins in wholesaling their clients to banks’ wealth management teams. 

By avoiding these cash sins, you can effectively integrate a risk-free asset with some income-generating prowess that adds client value by helping them potentially earn, insure and save more — all while keeping these assets under your purview. 

Frank V. Bonanno is managing director, Head of Marketing of StoneCastle Cash Management, LLC.  The company manages $21 billion of cash for advisors and their clients via its Advisor.Cash program.

(Image: Adobe Stock)


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