Wealthy clients seek safe place to park cash

May 20, 2012 @ 12:01 am

By Andrew Osterland

With interest rates barely measureable, cash isn't quite king anymore.

But for wealthy investors, cash remains an important asset class, where safety and returns — however paltry — have assumed greater importance.

“As cash levels have grown, clients are trying to figure out ways to get something by way of yield,” said Jason Click, vice president of private-client services at Meeder Financial, a registered investment advisory firm.

Since safety is the primary concern, he said that he has seen an increase in interest among his wealthy clients for accounts insured by the Federal Deposit Insurance Corp.

Eric Lansky, a director at StoneCastle Partners LLC, is hoping to capitalize on that interest.

His firm can spread up to $20 million in cash per client among a network of 350 FDIC-insured banks and provide customers with a single statement of their cash balances. The interest paid is comparable to returns on a money market mutual fund, but it is all insured.

“The more sophisticated clients have larger cash balances. It's a bucket they hold funds in until they're ready to allocate them,” said Mr. Lansky, who declined to reveal how much cash his firm has placed with banks, but noted that balances in those bank accounts have grown by 40% year to date.

“What's different now is that cash is a bigger and more important part of their allocations,” he said.

Another option is the Certificate of Deposit Account Registry Services program offered by Promontory Interfinancial Network LLC, which spreads the cash among the CDs of one or more of 3,000 FDIC-insured member banks with which it deals.

INSTRUMENT MATURITIES

The maturities on the instruments can run from four weeks to five years. It recently introduced an insured cash sweep account that allows easier withdrawals and better liquidity for clients.

Promontory spokesman Phil Battey said that the firm's transactions spiked during the financial crisis and have leveled off at a higher level in the past two years.

Increased demand for bank accounts has coincided with growing concerns about the safety of money market mutual funds since the financial crisis. The infamous “breaking of the buck” by the Reserve Primary Fund sparked an exodus from money market funds over the past three years.

“The integrity of MMFs was brought into question in 2008,” said Rick Pitcairn, chief investment officer of Pitcairn, a multifamily office.

“The backdrop of fear in the global marketplace is still there,” he said. “We now see the same level of due diligence being conducted on money market mutual funds as on any other investments.”

For most of Mr. Pitcairn's clients, cash management hasn't become a significantly bigger issue, because he doesn't advocate using cash as a timing vehicle to avoid risk.

“We haven't experienced large cash buildups with most of our clients, because we've stuck to our investment policies,” he said. “If we've had a change at Pitcairn, it's that we now put as much rigor into assessing cash management as we do to hedge funds and private-equity investments.”

During the financial crisis, it was the U.S banks that put the biggest scare into the market, and investors afraid of funds' exposure to short-term credit risk took their money elsewhere. Cash in U.S. money market mutual funds — which aren't insured — has fallen by 33% since the end of 2008 to about $2.6 trillion, while cash in FDIC-insured money market deposit accounts has swelled by 44% to nearly $6 trillion, according to Federal Reserve data.

The bogeyman in the money market fund industry now is Europe.

PRIME FUNDS

Prime money market funds — which invest in a wide range of short-term-debt securities — increased their exposure to eurozone bank debt by $52 billion in the first four months this year, according to a recent analysis by J.P. Morgan Securities LLC.

Currently at $205 billion — about one-fifth of total assets in the funds — those European holdings are still less than half of what they were a year ago, according to the analysis.

Nevertheless, high-net-worth investors are still wary of what money funds invest in. And if the SEC implements additional regulations on the funds, demand could fall still further.

“There's a desire for yield, of course, but the experiences of 2008-09 still linger for people,” said Charlie Grace, a senior consultant at the Family Office Exchange, an organization that provides services to 330 family offices.

“Families are spending a lot more time thinking about cash than they used to. The questions they ask now involve the underlying instruments in which their cash is invested,” Mr. Grace said.

Evan Bolinski, a senior investment analyst at GenSpring Family Offices LLC, recommends that investors stay conservative when it comes to their cash.

Last June, he suggested that his clients get out of prime money funds with exposure to European financial institutions, and he still thinks that they should stay in funds that invest only in short-term Treasuries and agency debt.

Those funds may pay only 1 to 20 basis points now, but they are safe.

“If things get ugly again, the last place where you want problems is in your cash account,” Mr. Bolinski. said.

“That portion of the allocation is about security,” he said. “To do something stupid there doesn't make sense to us.”

aosterland@investmentnews.com

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