A Spring 2023 CNBC survey showed that millionaires have increased their cash holdings to 24% of their portfolios from 14% one year ago. This trend was echoed by Capgemini’s 2023 World Wealth Report which indicated a similar change in cash holdings of high net worth individuals.
It’s no secret that extra cash can provide many benefits in a portfolio – like a cushion from market turbulence and the opportunity to invest quickly. However, holding large sums of cash in an investment account also creates additional risk. As an RIA, your fiduciary duty requires that you identify these risks and choose client appropriate investments that mitigate them.
Uninsured Cash Reserves Are a Safety Risk
The Federal Deposit Insurance Corporation [FDIC], the National Credit Union Administration [NCUA], and the Securities Investor Protection Corporation [SIPC] provide insurance against the failure of financial institutions, but all have limits on the amount they cover. For cash, the maximum coverage from the FDIC, NCUA, and SIPC is $250k. Additionally, SIPC covers most types of investments in your account up to $500k – with a maximum covered total of $500k for cash and securities. If one of your clients has more than the covered limit in an investment or bank account, those funds are at risk.
These types of insurance are particularly important during times of economic stress, such as the Great Recession. In 2008 alone, SIPC protected covered assets at failed investment companies Lehman Brothers, Inc., and Bernard L. Madoff Investment Securities LLC. However, a large sum of uninsured money was lost. The same year, 25 banks with $373 billion in assets failed, and the FDIC protected insured deposits from these banks.
Today, clients with cash balances above the covered limit remain at risk of losing it. As evidence of this, three of the four largest bank failures in history occurred in 2023 – leaving huge sums of depositor cash in limbo. This is why it’s critical for RIA’s to secure and maintain adequate protection for client cash.
Inflation Poses a Risk to Cash Investments
While inflation has moderated from the record highs seen in 2022, the purchasing power of the dollar continues to dwindle. This means clients who keep large sums of uninvested cash in their accounts may not see their balances decline, but they are getting poorer.
As a fiduciary, your charge is to locate competitive returns for client cash that counteract the effects of inflation. However, finding the most competitive rates among thousands of financial institutions and investment options is a major challenge.
Managing Risk with Cash Investments
There are several types of cash investments, and each offers a different blend of benefits and drawbacks. By understanding the options, you can locate the right investment to achieve safety, competitive returns, appropriate liquidity, and ease of management.
Money Market Mutual Funds
While not technically a cash investment, money market mutual funds are a popular choice for liquid funds. These securities provide easy access to funds, simple management, and a competitive yield. However, they offer limited safety compared to other cash investments.
Like other mutual funds, money market funds are protected by SIPC up to the $500,000 securities limit. However, clients with more than this amount are still at risk. Additionally, SIPC does not protect the value of investments, so clients are vulnerable to a repeat of 2008’s breaking of the buck.
Bank Sweep Accounts
Bank sweep accounts typically offer extended FDIC protection by spreading cash across multiple insured banks. Along with extended safety, these accounts typically provide liquidity and easy management. However, they often sacrifice yield to achieve these goals.
For example, Wells Fargo Advisors bank sweep account yielded just 0.85% for clients with between $5 and $10 million in assets on July 18, 2023. On the other hand, many money market mutual funds and savings accounts paid between 4 and 5% for similar clients.
Bank Certificates of Deposit and Deposit Accounts
Certificates of Deposit [CDs] typically provide the highest yield for client cash with the most restrictive liquidity. CDs offered by banks and credit unions also offer the highest level of safety – FDIC / NCUA insurance. Unlike SIPC, the FDIC and NCUA protect the value of cash – both principal and accrued interest.
Similar to CDs, deposit accounts – such as savings and money market accounts – provide government insurance and can sometimes include competitive yields. They also provide liquidity that meets most clients’ needs.
While these banking products provide government insurance, coverage is still limited to the FDIC / NCUA maximum. As such, clients with large balances in a single financial institution remain at risk. One solution to this issue is manually opening accounts at multiple FDIC-member banks or NCUA-member credit unions to extend coverage. However, this process can be difficult to manage. For example, a client with $5 million in cash would need accounts at 20 different banks to achieve full FDIC protection. That means 20 yields to monitor, statements to reconcile, and tax forms to handle.
Fintech Powered Deposit Management
With traditional cash investments, RIAs had to make sacrifices when managing client cash. Now, advances in financial technology – a.k.a. fintech – have led to a new type of cash investment that solves this problem.
Modern fintech allows you to achieve full government protection for client cash without the hassle of managing multiple banking relationships. In addition, your clients can access competitive returns, simple management, and the liquidity they need – all in a single account.
Marketplace Banking™ By ADM Helps RIAs Manage Client Cash
Our company, the American Deposit Management Co. [ADM] offers a robust cash management solution for RIAs. It’s a concept powered by proprietary fintech that we call Marketplace Banking™. It allows us to help you spread millions in cash across a nationwide network of financial institutions that compete for deposits. This means that your clients can achieve full government protection – above and beyond the traditional limit – with a single account.
In addition to enhanced safety, our American Money Market Account™ provides nationally competitive yields and twice-weekly liquidity. We also offer term deposit options, including CDs and CD ladders, to capture higher returns without sacrificing safety.
Our experienced team makes it easy to achieve safety, liquidity, and returns. All it takes is a simple application and a single deposit. Then, we handle the investments and provide one consolidated monthly statement and one 1099-INT.
To learn more and get started today, contact us.