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With the twin losses of Silicon Valley Bank—the second-biggest bank failure in U.S. history—and Signature Bank, the federal government has moved quickly to shore up public confidence, providing account holders with access to all money, even on accounts exceeding the Federal Deposit Insurance Corporation limit of $250,000, which in the case of SVB, included more than 90% of their deposits.
Despite these assurances, the renewed focus on the health of U.S. banking system has caused considerable consternation, not just within the financial services sector, but more widely. Across the country, Americans are asking: How safe is my money? If my bank were to fail, would I get all my money back? What should I do if I have more than $250,000 in cash?
Cash is an important part of any investor’s portfolio, but, too often, financial advisors have little insight into how much their clients are actually holding. For financial advisors, this crisis offers an opportunity not only to strengthen client relationships but to spur a larger conversation about how cash fits into an overall portfolio, and ensure the money clients hold is fully protected, whether it’s in the brokerage account or not. To start a dialogue with clients, consider the following:
De-Risk and Maximize Interest
At minimum, ensure that your clients’ cash is FDIC insured. FDIC insurance provides protection on deposits up to $250,000 per depositor per account category, per bank. If cash exceeds those limits, clients should spread their savings across multiple banks to keep within the threshold— otherwise, they’re putting themselves at risk if a bank collapses. And by spreading cash across multiple banks, advisors can help their clients eliminate the risk of a single point of failure. Much as in equities, with cash, diversification is key.
Once your client knows their money is safeguarded across multiple accounts and backed by the full faith and credit of the U.S. government, the big difference boils down to interest rates. According to the FDIC, the national average yield for savings accounts is 0.35% APY. However, online banks, which have lower operating costs, typically offer higher interest rates—up to 5.05% APY today. That means a client with $100,000 in cash could earn as much as $5,000 per year in incremental interest – compared to just $350 per year at a bank paying the national average.
Beware the Fine Print
How can you ensure clients’ cash is safe, liquid, and earning the maximum in interest? It’s critical to read the fine print, as not all cash solutions are created equal.
Historically, the brokerage industry used so-called ”brokered deposits” to try to assure clients their cash was safe. Deposit brokers are intermediaries who sell client’s deposits to other banks in exchange for earning a spread. But these services can be risky for clients because the cash is not custodied in the client’s own account, nor do account holders have immediate access to their money. If the originating bank were to fail, clients lose access to all their cash. There’s no direct relationship between the client and their cash in each bank. That’s a mistake, and a risk that’s not worth taking. After all, these brokered deposit solutions provide lower yield, with greater risk and less liquidity, vs. simply keeping cash titled in a clients’ own name in their own bank accounts. By skipping deposit brokers, clients can hold cash directly and have immediate liquidity, with no single point of failure.
The takeaway: when evaluating cash management solutions for your clients, make sure the money is held directly in the account holder’s name with same-day liquidity. Otherwise, you’re taking unnecessary risk.
Gain Greater Visibility.
It’s difficult for advisors to get the full picture of their clients’ cash holdings. You might discuss the matter during a client’s annual review, but those figures are likely to fluctuate throughout the year any time a client makes a large purchase, receives a bonus or comes into an unexpected windfall.
According to the Capgemini World Wealth Report 2022, high net worth individuals hold 24% of their assets in cash and equivalents. By talking with your clients about cash and providing them with a way to earn more on held-away cash, you will gain better visibility into how much they are holding. Doing so can help you grow your AUM and deepen existing relationships.
As an advisor, it’s your fiduciary responsibility to understand all aspects of your client’s financial lives—especially an asset class that typically comprises one-fifth of their liquid net worth. If you’re not asking about their cash, my question is: Why not?
For many, the demise of Silicon Valley Bank and Signature Bank has brought back stark reminders of the 2008 financial crisis. Thus far, we’ve avoided a system-wide collapse, and the banking sector is, by many measures, much stronger than it was in 2008. But financial advisors and their clients must not close their eyes to potential risks.
JFK said: “In crisis, be aware of the danger—but recognize the opportunity.” As we confront yet another potential crisis, don’t squander this opportunity. Both reassure clients they are protected while also setting them up for even greater long-term success.
Gary Zimmerman is chief executive officer of MaxMyInterest. For information, visit www.MaxForAdvisors.com.
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