Interest rates are rising, and that means cash is once again assuming a larger role in the income that investors receive after years of near zero returns.
Earlier this month, the Fed raised interest rates -- another step in a trend that economists expect will continue through the end of the year at least.
Higher rates from the Fed typically mean rates on all kinds of fixed-income investments increase -- as well as on savings accounts. This affects advisors’ clients who hold cash as a form of dry powder, allowing them to pursue other investments as attractive opportunities arise.
Advisors are also looking at cash as a way to highlight their role as fiduciaries. Cash is the universal asset class -- every client holds it -- and it presents an opportunity for advisors to prove their value to clients without adding any risk to the portfolio.
How can financial advisors help clients who hold cash as we move into a period of rising rates? CD ladders are a traditional option, but if rates rise more quickly than expected, investors will miss out on the ability to earn more.
Importantly, advisors often overlook the much higher rates of online banks as a key piece of their strategy. These banks are FDIC-insured, just like any brick-and-mortar bank, so clients’ money is safely government-guaranteed, as long as accounts are kept below the insurance limits ($250,000 per depositor, per account type, per institution).
Because online banks don’t have to spend money on tellers or real estate for branches, they are able to offer higher yields. As rates have risen overall, online banks in recent months have begun raising the rates they offer to depositors, while brick-and-mortar banks have largely kept their rates at close to zero. The highest-yielding online banks now pay rates that are more than ten times the amount brick-and-mortar banks pay on savings deposits. There is usually no fee to hold these accounts, so opening an online savings account is all that’s required to begin earning more.
Because investors, and in particular high net worth investors, hold considerable amounts of cash and equivalents -- the average U.S. household in this demographic has 23.7% of its holdings in cash, the Capgemini World Wealth Report found -- their total portfolio will do better if the cash portion begins to earn more. This takes some pressure off the rest of the portfolio to perform and allows the advisor to showcase his or her holistic advice to the client.
To capitalize on this opportunity, financial advisors should talk to their clients about held-away cash, working together to determine an optimal allocation strategy, including how to manage cash until the client is ready to invest it.
Michael Halloran is the Head of Partnerships and Business Development at Max (MaxForAdvisors.com), an intelligent cash management solution for financial advisors and their clients, which helps maximize yields on cash while increasing FDIC coverage. A longtime financial technology executive, he tweets at @fintechblogger.
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