Why Advisors Shouldn't Ignore Clients' Held-Away Cash

Independent RIAs pride themselves on helping clients with every aspect of their financial lives. Yet it turns out that advisors — even fiduciary, holistic, planning-oriented advisors — often ignore the simplest asset class of them all: cash.

As advisors are increasingly pushed to deliver more value to their clients, and as interest rates have skyrocketed in recent months, advisors have an opportunity to deliver more value — while building their businesses — with a focus on cash.

It turns out there’s a bigger reason to focus on cash than most advisors realize. Over the past five years, we’ve seen that many advisors simply do not know how much cash their clients hold in the bank.

When we’ve asked advisors how much cash they think their clients hold — meaning, the uninvested cash that advisors manage at custodians — advisors frequently answer “1-2%.” Yet numerous studies, such as the 2022 Capgemini World Wealth report, show that high-net-worth investors actually keep 20% or more of their wealth in cash.

To advisors fighting to minimize cash drag in the portfolio, such large cash balances may sound impossible: “that might be true for other advisors, but not for my clients.”

But data from Flourish Cash tells another story. In a recent analysis, we found that across the more than 500 RIAs we work with, clients with a self-reported net worth of $1 million to $2 million hold an average of $183,672 in Flourish Cash accounts. There is far more cash out there than many advisors think.

‘Out of Sight, Out of Mind’

And why are advisors blind to held-away cash? To start, held-away cash sits outside of the portfolio — out of sight, out of mind. Advisors almost never charge on held-away cash, reducing the incentive to pay attention.

And, until recently, the lack of advisor-centric solutions meant that advisors couldn’t help clients open or manage accounts, leading many advisors to avoid the conversation entirely.

Yet for clients, cash is a critical part of their everyday financial life. Cash enables daily household liquidity, fills up emergency funds and is often the right vehicle for short-term liabilities, from home purchases to tax bills.

More deeply, cash helps clients “sleep at night.” Studies have even found that individuals who have more cash on hand feel more confident about their finances and ultimately, are more satisfied with their lives. Instead of net worth, income or investments, happiness is driven by the amount of cash in the bank.

Perhaps more difficult for many advisors to accept is the fact that many clients view cash as “their money,” somehow distinct from funds held in the portfolio. As my own mother has said to me, “I trust my advisor with everything, but I don’t want to have to ask permission to make a big purchase or redo the kitchen.”

3 Steps to Take

How can advisors use this knowledge to build their businesses?

First, advisors should start the conversation. In the next quarterly meeting, advisors should ask clients how much cash they are holding, then ask basic follow-up questions to understand whether that cash is held in checking or savings accounts and what rates clients are earning.

Advisors can even follow this strategy with prospective clients, delivering value well before winning a new client.

Second, when advisors understand how much cash is held away, they can help clients optimize.

Given current rates available through various savings solutions, advisors may be able to help clients pay for a vacation or even offset a substantial portion of their advisory fees. And during a period of market uncertainty, advisors have an opportunity to message that they’ve identified another opportunity to help clients reach their goals.

Finally, once advisors have brought held-away cash into their orbit, new conversations may open up. Advisors may need to update client risk profiles to account for outsized cash holdings, while other clients may actually be able to increase their equity positions.

Over time, advisors may have the opportunity to bring excess cash into the portfolio itself, increasing fee-earning assets.

If you haven’t had an open conversation with clients about their cash, now is the time. Take advantage of rising rates and easy-to-access solutions that let you show added value to clients while bringing cash into your orbit.

Ben Cruikshank is the president of Flourish. Flourish Cash is a service offered by Flourish Financial LLC, a registered broker-dealer and FINRA member (not a bank).

(Image: Shutterstock)