High-Interest Cash Management Solutions: What to Know

What You Need to Know

The recent collapse of three major banks has brought the issue of clients' cash to the forefront.
Helping clients invest excess cash can add value to your relationship with them.
Advisors can consider a number of cash management solutions in addition to what is available at their brokerage firm.

The failures of Silicon Valley Bank and Signature Bank within a week of each other in March, followed by the more recent failure of First Republic Bank in early May, have frightened many investors and advisor clients. While cash is often an afterthought for both advisors and their clients, these recent bank collapses have moved this issue to the forefront.

These current dynamics provide a good opportunity for advisors to discuss some basic cash management options with clients.

Cash deposits at banks are insured by the Federal Deposit Insurance Corp. only up to $250,000. As interest rates continue to rise, clients may be interested in earning more on their cash than their bank is willing to pay. Cash management accounts can help advisors and clients solve both these problems.

In evaluating a cash management account, be sure to carefully consider all aspects of the account to ensure it aligns with your client’s cash management goals.

What Are Cash Management Accounts?

Cash management accounts started to proliferate in 2019 as a feature of online investing platforms. Robo-advisors Betterment and Wealthfront, as well as the online brokerage app Robinhood, all introduced cash management accounts that year. Several major custodians, including Schwab and Fidelity, offer their own versions of these accounts.

A cash management account is less like a regular bank account and more like the sweep accounts common at brokerage firms. Some features set these accounts apart from high-yield savings accounts and bank accounts.

Through partnerships with multiple banks and brokerages, cash management accounts are able to offer a higher limit on FDIC protection than traditional bank accounts.
Clients already using brokerage platforms like Fidelity, Schwab and others who offer cash management accounts can have both banking and brokerage needs met in one place.

Cash management accounts at traditional brokerage firms vary in both the interest rates paid and in the features of the versions available for advisors to use in conjunction with client accounts.

Beyond Brokerage Accounts

We’ve seen several third-party cash management apps geared toward advisors and their clients come to prominence recently. Here is a look at three of these services.

MaxMyInterest

MaxMyInterest allows financial advisors to view client account balances across linked checking and savings accounts regardless of the reporting or planning software used by the advisor. This tool integrates with a variety of popular reporting platforms, planning software and CRM tools used by advisors. The service is free for advisors. Clients pay a fee of 0.04% per quarter with no minimum account requirements.

The service also proposes an optimal allocation among a client’s linked bank accounts to help maximize interest and to ensure they stay within FDIC limits across their accounts.

MaxMyInterest monitors interest rates in bank accounts daily. Once per month, it proposes an optimal allocation of a member’s cash among bank accounts to maximize their returns.

Max is independent of any financial institution. A Max checking account links to bank and brokerage accounts at a number of U.S. institutions. Additionally, customers can link directly to accounts at 18 of the largest bank and brokerage firms in the country, including Fidelity and Charles Schwab.

MaxMyInterest clients can earn up to 5.1% interest on their deposits.

Flourish

Flourish, a wholly owned subsidiary of MassMutual, is available to financial advisors by invitation only. The company offers cash management services for advisors, as well as the opportunity to invest client assets in cryptocurrency. Its site indicates these functions are completely separate from each other.

On the cash management side, Flourish touts itself as a solution for clients’ held-away cash. Its advisor-centric solution helps bring this cash back into the advisor’s orbit. The service indicates it can be a good source of referrals to advisors as many individual investors have questions about managing their cash.

Can Advisors Charge an AUM Fee on Cash Management?

Cash management solutions like the three profiled above offer an opportunity for advisors to gain a degree of control over a larger piece of some clients’ assets.

Your clients will be grateful for your help in steering them to a service that can help them earn a high interest rate with higher levels of FDIC coverage. Whether it makes sense to include this cash in their asset total if you bill on an AUM basis is a decision you will have to make.

On the one hand, your advice as to where clients should invest their cash balances to earn the best interest rate with FDIC coverage is a valuable service. Whether clients should be charged on the order of 1% for this service is for you to decide.

Perhaps you might charge a flat fee or a lower percentage rate on these assets. Also keep in mind that some of these assets may end up in the client’s investment portfolio at some point.

Offering access to cash management solutions like MaxMyInterest, Flourish or StoneCastle can be a way to reinforce your value to your clients and can help cement your relationship. This can also make you even more referable by your clients.