What You Need to Know
- The loss of trust in banks gives advisors a chance to review some basics, like the limits of FDIC insurance, with clients.
- In addition to ensuring clients’ cash deposits are properly insured, advisors can help them seek higher yields.
- Many retirement-focused investors actually hold too much cash, leaving them exposed to inflation and longevity risk.
Word emerged over the weekend that UBS Group AG had agreed to buy Credit Suisse Group AG in what commentators have already described as “a historic deal” brokered by the Swiss government aimed at containing a crisis of confidence in the global banking system.
The new development came less than two weeks after Silicon Valley Bank became the biggest U.S. lender to fail in more than a decade, following its now-tarnished leadership’s unsuccessful attempts to raise capital and an ensuing exodus of cash from the tech startups that had fueled the lender’s rise.
As of Monday morning, the share prices of other regional banks continued to slide, particularly First Republic Bank, although some midsize U.S. lenders began to see promising signs of renewed interest from investors.
According to Jamie Hopkins, managing partner at Carson Group, these rapidly unfolding and interrelated events have underscored a few foundational financial planning concepts that seem to have been forgotten by many investors (and advisors) in the wake of the Great Recession.
As Hopkins emphasizes in a video posted to his Twitter channel, the unfolding banking industry drama shows that investors must take greater care in the management of their cash and cash-like assets, and that inherent “conflicts” in the banking system can leave long-term investors exposed to excess risk.
A Challenge of Trust
“A big part of the problem we are seeing boils down to a sudden loss in trust in these institutions,” Hopkins says.
That’s not something advisors can easily remedy, but they can use this as an opportunity to reemphasize some basics that should have been considered all along.
“First, we need to understand that banks are incentivized to hold their customers’ cash,” Hopkins says. “When you walk into a bank, they don’t rush to tell you that your deposit insurance is limited to $250,000 amount. They don’t tell you that you should only put that amount of money in their institution and then spread out the rest. Frankly, that’s a conflict the banks have, and that type of dynamic is at play across the ‘cash world.’”
As Hopkins points out, various entities in the financial system simply generate more of their own returns by holding more cash, so there is a direct incentive to have clients concentrate their cash — even if that means the clients are not fully protected by available forms of deposit insurance.
“That’s one of the key takeaways from this whole situation for financial planners and their clients,” Hopkins says, especially over the long-term and in the effort to prepare for retirement.
Being Smarter With Cash
Hopkins suggests advisors can utilize this moment to show their clients the importance of being “smart with our cash.”
“We all know that we don’t want to just stuff our cash under the mattress,” Hopkins says. “But we also need to understand the risks inherent in just parking all our cash in one account at one institution.”