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Michael Kitces

Portfolio > Mutual Funds

Kitces: Where to Park 3 Types of Client Cash

By Dinah Wisenberg Brin

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What You Need to Know

  • Yield matters more for some cash stashes than others, Kitces says.
  • There might be two types of cash inside the same investment account.
  • There are a number of solutions available to help clients find good yields and keep FDIC protection.

Clients may wonder where and how to best park and use their cash.

Michael Kitces, head of planning strategy at Buckingham Strategic Wealth and financial planning education blogger, recently shared his ideas on the matter in a video hosted by Christine Benz, Morningstar personal finance and retirement planning director.

Kitces sees three main places for investors to place their cash, noting there are many buckets where this asset can sit, per an interview transcript.

1. ‘Frictional Cash’

This cash typically dwells in investment accounts, where clients may need relatively small amounts on hand for immediate use, perhaps for required minimum distributions or advisory assets-under-management fees, he said.

Where to put it: “There’s not a lot that we typically do with this,” Kitces said. “In most investment platforms, this goes to some kind of cash sweep or money market funds.”

This cash may not generate the best yield, “but if I have to trade into something else, then it’s kind of defeating the purpose of cash I really need available to fund my distributions. And so, I find for most investors whatever that very small amount of frictional cash is, it tends to just kind of sit there. … It’s usually protected by the core protections that are in place, of FDIC coverage for sweeps or whatever is there,” Kitces said.

2. Investment Cash

On the other hand, some cash may sit in the same account but for other purposes, such as giving investors the funds to take advantage of market opportunities or a conservative cushion against volatility, he said.

Where to put it: Advisors should look for better yields on these assets than for frictional cash, he suggested.

“I want to be able to deploy it for an investment opportunity, but I don’t need access to it to spend right away. And because of that, what we see a lot of the time for investment cash is we don’t usually literally hold it in cash,” Kitces explained.

“Maybe we’ll trade into a money market fund. Maybe we’ll trade into an ultra-short-term Treasury fund and try to get a little bit more yield out of Treasurys,” he said.

While advisors and clients might call it a cash position, “we usually shop a little bit more for yield, but we’ll often do it within the investment account because this is dry investment powder. I do want to have it available to invest. So, we shop for yield a little bit differently.”

There’s typically no FDIC protection for this cash allotment, but “that might be because I’m buying a Treasury fund and have the full faith and credit of the United States government instead. So, I typically still want to keep that very secure,” Kitces said. “We’re following what’s the safest, secure, most liquid investment I can buy in an investment realm, not a cash banking realm.”

3. Short- to Medium-Term Savings

Clients should allocate money they’re saving for short- to intermediate-term goals, like weddings or house down payments, to reserve cash, which wouldn’t necessarily sit in an investment account, Kitces said.

Where to put it: “These are the dollars that we often sit in bank accounts, and we shop for yield,” he said. “So, we see a lot of investors that take this and say, ‘I actually want to maximize yield not because I’m trying to find which Treasury fund has the highest yield; it’s because I’m trying to find which bank, or probably these days, which online bank has the highest yield.”

Services like MaxMyInterest are popping up that will shop for yield for customers across multiple banks. “You don’t even have to stay on top of it and move all the money around yourself,” he said.

Advisors have tools like Flourish and StoneCastle that help shop for yields and help spread the money across multiple banks so clients don’t have to worry about the $250,000 FDIC coverage limit ($500,000 for a joint account), he said.

“If this is a big reserve I’m building up … FDIC insurance might start to matter,” Kitces said.

Dinah Wisenberg Brin

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