Outside-IN

Your competition is cashing in on your clients. Stop them!

Financial institutions offering higher rates on deposits are using these accounts to source clients for their advisory businesses

Jan 16, 2019 @ 3:49 pm

By Frank V. Bonnano

According to a recent InvestmentNews survey, 45.3% of advisers plan to increase allocations to cash in 2019. This comes as no surprise. Given the recent market volatility and rising short-term rates, cash is dominating the media as the shiny asset class of 2019. At the same time, your clients may be asking about better yielding options for their non-sweep cash balances.

Brick-and-mortar and online banks and others have begun to ratchet up rates on cash to appeal to rate-sensitive investors. Even fintech companies like Robinhood have focused on cash. Although Robinhood has hit some roadblocks to the launch of its cash offering, it's clear that investors are responsive to the cash message.

Although cash is the asset class to which every client has exposure, it is typically the least spoken about. With such a keen focus on longer-term wealth management strategies, many advisers are not prepared to talk to clients about cash and often are defensive when questioned about better-yielding or insured cash options.

When investors ask about higher rates at online banks, many RIAs are far too willing to encourage these clients to park large sums of cash at these institutions — or let's just call them what they are, the competition.

Gateway asset class for competitors

The fight for deposits is on. Earlier this month, CNBC reported that Goldman Sach's Marcus increased its cash rates to 2.25% and now has over $27 billion in deposits from two million accounts.

The message that is getting lost is that these institutions are using these bank accounts to source clients for their advisory businesses. It makes no sense that an adviser would send client cash to Marcus or other institutions outside of their control and introduce their clients directly to the competition, which is likely to have significantly more resources than your typical RIA.

You wouldn't send your clients to open an account at Goldman or Merrill, yet that is exactly what RIAs are doing when they encourage clients to open accounts at Marcus, Bank of America or any other bank.

Don't believe me? Then why is Goldman planning to move Marcus into Goldman's investment management division and potentially introduce a new product as a robo-adviser? Why did Wells Fargo announce late last year that it will put a toe in the RIA channel? Programs like MaxMyInterest actually make it easier to send your clients to the competition by directly introducing them to multiple banks.

The decade of all cash being equal is behind us. By realizing that cash is not a commodity and that there are different options for transactional sweep cash versus strategic, non-sweep cash, you can better manage current assets and potentially attract significantly more AUM.

The proof points are that the average brokerage account has approximately an 8% allocation to cash, yet high-net-worth and ultrahigh-net-worth investors (the majority of your clients) maintain an average 15% to 23% of household assets in cash.

Stop sending it to the competition! Now is the ideal time to bring it into the advisory relationship and add client value in the process.

The increasingly important cash conversation

So what are your options for strategic cash beyond competing banks with advisory arms? For starters, there are U.S. Treasuries, brokered CDs and uninsured money funds.

Another option advisers use is structured bank deposit vehicles that provide high levels of federal insurance, typically with competitive rates. These include laddered CD programs like Promontory's CDARS or more liquid programs like StoneCastle's FICA For Advisors, with a rate north of 2.25%.

The bottom line is that cash is entrenched in the headlines, your clients will be asking which options are right for them, and your competition is salivating over and marketing to your clients.

Talk to your clients about their cash and introduce them to safe and many times more competitive cash options that are available directly through you. You work hard enough already at your job, there is no reason to add "wholesaler for the competition" to your list of responsibilities.

Frank V. Bonanno is managing director and head of marketing for StoneCastle Cash Management, a specialist in extended FDIC insured cash solutions.

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