Bank failures spotlight cash management platforms

Financial advisors look for creative ways to keep client cash accounts from going over the $250,000 limit on FDIC coverage.

The abrupt failure of two banks in less than a week has sent financial advisors scrambling to double-check the potential risk associated with their clients’ cash balances, and that’s translating into boom times for some cash management platforms.

Normally one of the most mundane pieces of a client’s portfolio, cash management is front and center in the wake of the collapses of Silicon Valley Bank and Signature Bank.

“Clients are perturbed but unsure what is really going on,” said Eric Amzalag, founder of Peak Financial Planning. “Events are unfolding so quickly that the average retail investor will struggle to keep up with what has happened, what is happening currently and the probable outcomes ahead.”

While the federal government has stepped up to varying degrees to backstop investors and the broader banking system, depositors have become keenly focused on FDIC insurance, which is typically capped at $250,000 worth of savings per person.

“We’ve been getting a ton of phone calls and it’s been pretty crazy,” said Frank Bonanno, managing director at StoneCastle Cash Management.

The stories related to the recent bank failures, include the woes of savers who’ve exposed millions of dollars to risk by concentrating cash well beyond the FDIC coverage limit, have shone a fresh light on the “tenets of cash,” Bonanno said.

StoneCastle, which operates as a brokered deposit platform affiliated with 900 banks, claims it can provide up to $100 million worth of FDIC insurance by spreading deposits across multiple underlying banks.

With an estimated $7 trillion worth of uninsured deposits sitting in banks, Bonanno said advisors should see the latest developments in the banking industry as a wake-up call to find out where their wealthier clients are holding cash.

“There’s no reason to panic, but advisors really should want to do right by their best clients,” he said. “We don’t like to exploit negative news, but market events like this shine a light on the importance of FDIC insurance.”

Gary Zimmerman, founder of MaxMyInterest, said the problems rolling across the banking industry are the reasons cash management platforms exist.

“As an outside depositor, you don’t know what’s going on, and that’s why it’s important to spread your money over several FDIC-insured banks,” he said.

MaxMyInterest is affiliated with eight banks, which translates into $4 million worth of FDIC insurance per saver.

Unlike the brokered deposits model used by StoneCastle, MaxMyInterest links savers directly to each underlying bank, providing access to each account and daily liquidity.

In terms of how the bank failures are impacting business, Zimmerman said, “Our servers are getting a really good workout.”

“What’s happening right now highlights the message we’ve been sharing for 10 years,” he added. “You’re taking on risk that you’re not being paid for if you’re not FDIC-insured.”

Chuck Failla, founder and chief executive of Sovereign Financial Group, uses the StoneCastle platform for his clients and he believes most individual investors understand the $250,000 FDIC insurance protection cap.

“However, it is clear that many large bank depositors ignore that fact and maintain deposits over the FDIC limit,” he said. “That’s not a problem until it is.”

Thilan Kiridena, founder of Capital Elements, said some of his clients have deposits above the FDIC-insured limit and are very concerned.

On Monday morning he posted on social media a four-step approach to shoring up cash allocations, including advising married couples to open separate cash accounts with no more than $250,000 in each account.

In terms of what the bank failures say about the health of the overall banking industry, Kiridena argued that it’s a mistake to make comparisons between now and the financial crisis of 2008.

“A bank’s business model, in short, is to raise deposits and lend to others that need them,” he said. “When the general economy is not doing well, loans don’t get repaid, and nonperforming loans increase. This creates losses that need to be absorbed by the banks. In my view, this is more of an SVB-specific problem, but given the widespread panic in the market, the smaller banks will need to ensure they have sufficient measures in place for additional withdrawal and transfer requests that can come in from clients in the next few days.”

Dennis Nolte, vice president at Seacoast Investment Services, which is owned by Seacoast Bank, said that his clients have been relatively calm but that the bank’s leadership is not taking anything for granted.

“We had an all-hands-on-deck meeting this morning to give us the facts and figures on our numbers compared to the failed banks,” he said. “Right now, the pros seem to be taking more action than the retail clients.”