On the surface, cash appears to be one of the least controversial asset classes and it’s usually not one that elicits strong feelings one way or the other among advisors and clients.
That’s a good starting point, but the fact remains that there are some “sins” advisors can commit when it comes to sizable cash positions. Fortunately, avoiding those missteps is easy when the right partner is embraced. Advisor.Cash by StoneCastle Cash Management (“StoneCastle”) is that partner in helping advisors attract, protect, and potentially earn more on their clients’ cash.
After what feels like an eternity of cash being essentially irrelevant, that script has been flipped today. Thank the Federal Reserve’s late arrival to the inflation-fighting party. Expect more of the same over the near-term with Fed funds moving up yet again at the September FOMC meeting.
As such, the dollar is the world’s best-performing major currency this year and cash is back in style. Those factors underscore the relevance of StoneCastle’s FICA for Advisors offering.
Three Cash Sins Advisors Need to Avoid
One of the primary cash sins some advisors commit is not realizing that there are options available to clients beyond CDs, money markets and T-bills. Those are considered the “safe, practical” ideas because bank-sponsored cash instruments feature the safety of FDIC insurance. However, that insurance only extends to $250,000 per account.
Suppose an ultra-high net worth client asks an advisor for assistance in generating some yield, albeit modest, on $10 million in cash. To get FDIC insurance in traditional fashion, that’d require the advisor spreading the client’s assets across a staggering 40 accounts. That’s burdensome and inefficient. As StoneCastle Managing Director Frank Bonanno notes, the firm’s FICA For Advisors (FICA) solution provides advisors’ clients with FDIC insurance on up to $25 million per tax ID though one account.
The next cash sin advisors need to avoid is substituting short-term bonds or “cash like” vehicles for cash. Cash is intended to be a risk-free asset class, but by turning the conversation to bonds –even ultra-short term fare – advisors introduce interest rate, duration, and principal risks into the equation. These days, that’s the last thing advisors should be doing.
Good news: Thanks to rising interest rates, the yield on StoneCastle’s FICA solution is at 3.51% APY. That’s almost in-line with the Bloomberg 3-12 Month U.S. Treasury Bill Index, but without interest rate risk and with 100% overnight liquidity.
Finally, there’s the issue of competition—and a ton of advisors are guilty of this. Many of the high-yield, online savings accounts out there are offered by banks that are part of larger financial services firms that compete directly with advisors. Think Ally or Marcus by Goldman Sachs.
By shipping client cash off to those banks, advisors are putting client retention at risk while embracing the aforementioned inefficiencies of dozens of accounts simply to get FDIC insurance.
“High net worth clients have a lot of cash typically held away from the advisor. This is evidenced by FICA’s average account size of approximately $3 million per tax ID. By not addressing clients’ cash needs and punting to online banks, advisors are committing the most egregious of sins in wholesaling their clients in name to banks’ wealth management teams,” adds Bonanno.
StoneCastle: Right Solutions for the Cash Comeback
Some experts argue that in order to adequately damp inflation, the Fed needs to bring its benchmark lending rate close to or above the Consumer Price Index (CPI). That was 8.5% in July, indicating it’s likely a stretch the Fed goes that far.
On the other hand, it’s possible rates will climb into 2024, indicating there’s at least an 18-month window in which cash will continue being an alluring asset class.
By becoming more cash knowledgeable and leveraging StoneCastle Cash Management, advisors can effectively integrate a risk-free asset with some income-generating prowess that adds immediate client value. Chances are, clients will thanks advisors that help them realize cash truly offers rewards with no risks…when it’s deployed the right way.
Related: Cash is Back as an Asset Class