Advisors, It’s Time to Start Asking Clients Cash Questions

Even with high interest rates, the national average for annual percentage yield on savings accounts is a scant 0.47%, according to the FDIC. In theory, that should be low enough for many clients to not be hoarding cash. Certainly not significant amounts of it.

On the other hand, owing to the aforementioned high interest rates, scores of banks are offering CDs and savings accounts with rates of 4% and higher. That’s high enough for many clients to keep potentially large amounts of cash on hand. Data confirm that is happening. As of the end of January, there was more than $6 trillion sitting in money market funds.

Clearly, that’s a massive sum and one that implies advisors should be more inquisitive with clients regarding cash holdings. Many advisors are apt to think they’re checking that box, but data indicate otherwise. Advisors should be more diligent when asking clients about their cash reserves. After all, even if just a fraction of that $6 trillion flowed to advisory and wealth management firms, it’d represent substantial top-line growth opportunities for practices.

Ask Cash Questions Now

The recently released “Client Cash: Mapping an Unexplored Opportunity” survey conducted by Flourish confirms advisors aren’t as knowledgeable about their clients’ proclivity for cash hoarding as they think they are.

“Surveyed advisors believe their average client holds 7% of their net worth in cash, while high net worth individuals actually hold more than 30% of their net worth in cash,” according to the survey,

As advisors know, 30% of one’s net worth in cash, even when interest rates are high, is risky, particularly when accounting for lost opportunity cost in equities. The Nasdaq-100 Index and the S&P 500 are up 32.7% and 29.8%, respectively, over the past three years when accounting for reinvested dividends –returns impossible to generate with CDs or money markets. Even with all above, advisors appear reluctant to discuss cash with clients.

“The critical cash conversation is frequently overlooked, highlighting a significant gap between awareness and action in the advisory field with 95% of advisors acknowledging the importance of addressing clients' cash needs as a professional responsibility but only 5% of advisors consistently inquiring about their clients' cash holdings,” adds Flourish.

Helping Cash-Heavy Clients

Assume that some clients want to maintain large cash stockpiles. That’s fine, but advisors can still add value because many clients may be holding cash in low-yielding instruments while those in the high and ultra-high-net worth camps might not be aware of some of the tools that can provide both safety and above-average yields.

Point is it’s fine that some clients want to keep some dry powder and that group will appreciate advisors helping maximize return on those assets.

“70% of surveyed advisors believe their clients would be interested in earning 4% to 5% in an FDIC-insured account. While it may seem irrational for clients to hold substantial sums in cash, the emotional need for liquidity and safety cannot be dismissed. Advisors have the opportunity to improve relationships while helping clients earn more by offering a cash management solution to every client,” notes Flourish CEO Max Lane.