Advisers walk fine line when managing client cash

Staying ahead of inflation in a low-yield environment can mean taking on more risk with emergency cash positions. The shortest-term certificates of deposit are yielding less than 65 basis points.

While most financial advisers continue to recommend their clients hold enough cash or liquid cash equivalent to cover between three- and six-months’ worth of living expenses in case of an emergency, the crushing reality of historic-low yields is leading to some shifting priorities when balancing safety and yield.

“I get the question about earning yield on cash at least once a week from clients,” said Paul Schatz, president of Heritage Capital. “There are plenty of solutions, but solutions don’t come with the same low level of risk as bank savings accounts.”

Once presented with the notion that higher yields mean potentially risking principle, Schatz said some clients are content to lag behind the current rate of inflation.

But for those willing to take a few steps out on the plank to earn something on what can be considerable cash allocations, Schatz recommends iShares 1-3 Year Treasury Bond ETF (SHY), which has a current SEC yield of 0.04% and is down 0.02% from the start of the year.

The ETF gained 3.03% in 2020.

For perspective, the shortest-term certificates of deposit are yielding less than 65 basis points, according to Bankrate.com. Savers would have to lock up their money for at least five years to get a CD rate close to 1%.

Moving further out the risk spectrum for cash management, Schatz, who doesn’t charge fees on cash balances, will direct clients to Pimco Short Maturity Active ETF (MINT), iShares Short Maturity Bond ETF (NEAR), and Invesco Ultra Short Duration ETF (GSY), which have SEC yields between 27 and 39 basis points.

Dennis Nolte, vice president at Seacoast Investment Services, often directs client cash balances to the online bank Ally, yielding about 0.5%, but said he gets some pushback because many of his clients are not familiar with and therefore uncomfortable with online banking.

“A local credit union sponsored by a large employer at a 0.4% yield” is often his last resort, he said. “Some of my clients like a local presence if the yield difference isn’t life changing. Most clients think the difference isn’t worth the uncertainty, even with FDIC coverage, because 2008 isn’t that far away for some folks.”

The recent stock market turmoil might make it easier for some advisers to convince clients to hold cash, but the trend of low yields and looming inflation from record government spending is likely here to stay.

“Unfortunately, with rates near all-time lows and massive amounts of stimulus making their way into the system, bonds are in a precarious position,” said Jamie Ebersole, founder and chief executive of Ebersole Financial.

Of the “few things that investors can do,” he said, “First, be resigned to the fact that you won’t earn much on your cash balances in the near term without taking on risk.”

“With yields so low, make sure you are investing in vehicles with low expenses,” he said. “Most money market funds have relatively high fees that will eat up a lot of your small returns.”

For clients with a time horizon for the cash of up to three years, Ebersole recommends building a portfolio of bond ETFs that uses many of the funds suggested by Schatz.

“Of course, if you need the cash for a critical purchase in the next two years, play it safe knowing that at least you will have your funds available even if they aren’t earning much along the way,” he added.