With the double-headed losses of Silicon Valley Bank — the second largest bank failure in US history — and Signature Bank, the federal government acted quickly to bolster public confidence by giving account holders access to all funds, even accounts that exceed the Deposit Insurance Corporation’s federal account limit of $250,000, which is in the case of SVB, contain more than 90% of their deposits.
Despite these assurances, the renewed focus on the health of the US banking system has caused significant dismay not just within the financial services sector but more generally. Across the country, Americans are asking: how safe is my money? If my bank went bust 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 their clients’ actual holdings. For financial advisors, this crisis presents an opportunity not only to strengthen client relationships, but also to stimulate a broader conversation about how cash fits into an overall portfolio and to ensure clients’ money is fully protected, whether it’s on the brokerage account is located or not. To start a dialogue with customers, consider the following:
Risk reduction and interest rate maximization
At a minimum, make sure your customers’ cash is FDIC insured. FDIC insurance provides protection for deposits up to $250,000 per depositor, per account category, and per bank. If cash exceeds these limits, customers should spread their savings across multiple banks to stay within the threshold – otherwise they are putting themselves at risk if one bank fails. And by spreading cash across multiple banks, advisors can help clients eliminate the risk of a single point of failure. Similar to stocks, diversification is key when it comes to cash.
Once your client knows their money is secured in multiple accounts and backed by the full trust and creditworthiness of the US government, the big difference boils down to interest rates. According to the FDIC, the national average rate of return 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 customer with $100,000 in cash could earn up to $5,000 a year in additional interest — compared to just $350 a year at a bank that pays the national average.
Pay attention to the fine print
How can you ensure your customers’ money is safe, liquid and earning maximum interest? It’s important to read the fine print as not all cash solutions are created equal.
In the past, the brokerage industry has used so-called “brokered deposits” to try to reassure customers that their money is safe. Depositors are intermediaries who sell customer deposits to other banks to earn a spread. However, these services can be risky for customers as the cash is not held in the customer’s own account and the account holders do not have immediate access to their funds. If the original bank fails, customers lose access to all of their cash. There is no direct relationship between the customer and their money at each bank. That is a mistake and a risk not worth taking. Finally, these brokered deposit solutions offer lower returns, higher risk and lower liquidity than simply holding cash in their own bank accounts in their own name. By skipping custodian brokers, customers can hold cash directly and have instant liquidity with no single point of failure.
Bottom Line: When evaluating cash management solutions for your clients, make sure the money is held directly on behalf of the account holder with same-day liquidity. Otherwise you are taking unnecessary risks.
Gain more visibility.
It’s difficult for advisors to get a complete picture of their clients’ cash holdings. You could discuss the matter during a customer’s annual review, but these numbers are likely to fluctuate throughout the year as a customer makes a large purchase, receives a bonus, or experiences an unexpected windfall.
According to the 2022 Capgemini World Wealth Report, high net worth individuals hold 24% of their wealth in cash and cash equivalents. By talking to your customers about cash and offering them a way to make more with cash held, you can get a better understanding of how much they are holding. This can help you increase your AUM and deepen existing relationships.
As an adviser, it is your fiduciary responsibility to understand all aspects of your clients’ financial lives – particularly an asset class that typically accounts for one-fifth of their liquid net worth. If you don’t ask for their money, my question is why not?
For many, the demise of Silicon Valley Bank and Signature Bank brought back strong memories of the 2008 financial crisis. So far we have avoided a systemic collapse and the banking sector is in many ways much stronger than it was in 2008. But financial advisers and their clients cannot turn a blind eye to potential risks.
JFK said, “In a crisis, be aware of the danger – but recognize the opportunity.” As we face another potential crisis, do not waste this opportunity. Both reassure customers that they are protected while setting them up for even greater long-term success.
Gary Zimmerman is the Chief Executive Officer of MaxMyInterest. For information see www.MaxForAdvisors.com.