Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Jamie Hopkins

Retirement Planning > Retirement Investing

Jamie Hopkins: SVB Collapse Is Wake-Up Call on Cash Management

Your article was successfully shared with the contacts you provided.

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.”

According to Hopkins, such cash-related risks can be concentrated in ways that are hard to see.

“For example, if your community’s home prices are buoyed by a bank’s presence in your community, and you have all your cash in that bank and your home mortgage is based there, all together, that represents some concentrated risk,” he explains. “What would happen to your long-term financial plan if that bank began to struggle or if it failed?”

Of course, clients should not blindly rush to move their cash from their current accounts at trusted institutions, but it is worth reconsidering why cash is held in certain locations and whether there are some adjustments that could be made to mitigate risk.

Don’t Forget to Look for Yield

Stepping back from the banking confidence issue, Hopkins says investors also need to remember how important it is to put their cash to work.

“As interest rates rise, we are facing some great opportunities to look for yield,” Hopkins says.

Since the financial crisis cratered interest rates and they stayed so low for so long, both advisors and their clients have grown complacent about the interest they are receiving in traditional savings accounts and short-term cash-like instruments.

“A lot of advisors and their clients aren’t out there paying enough attention to the yields and the FDIC insurance limits,” Hopkins says. “And here’s another thing about cash and the long term. Yes, we need to be prepared for emergencies, but I think too many people are overly insuring themselves against emergencies by holding too much cash.”

Holding cash often feels like the safest hedge, but it doesn’t help clients address inflation risk and longevity risk. As Hopkins points out, holding excessive cash might insulate a client from some shorter-term swings in the market, but they are shortchanging themselves in the long term by being under-risked.

“That fact raises the financial planning questions that we know we can grapple with,” Hopkins says. “For example, for most people, having an emergency buffer of three to six months of nondiscretionary expenses is likely sufficient, especially if other forms of insurance are in place.”

Other cash-related planning questions for clients to consider include:

  • Do you have tax liabilities that you need to meet this year or in the near future, for which you will very likely need extra cash?
  • Do you have very large anticipated purchases that you need to fund and get ahead of?
  • Are you a pre-retiree or an early retiree who is in that retirement red zone where you are most exposed to the dangers of negative sequence of returns risk?
  • What unique risks might you be facing that could result in a significant expense in the near term?

Ultimately, Hopkins concludes, a client’s approach to holding cash should be informed by their investing time horizons, their risk management preferences, their guaranteed and anticipated cash flow, and their broader expectations about spending patterns in the future.

“Advisors can do a lot to help their clients set good expectations about all of this,” Hopkins says.

(Pictured: Jamie Hopkins)


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.