One year later, many clients have forgotten key lessons from the banking crisis

Since the turn of the century, there have been more than 500 bank failures in the United States – a startling number considering there are 4,700 banks in the US.

A year ago, the collapse of Silicon Valley Bank and other bank failures caused an enormous spike in clients’ focus on the safety and liquidity of cash, and for good reason. Not since the 2008 financial crisis had such a shock reverberated through the banking industry and raised awareness among investors about the importance of FDIC insurance. 

But it’s easy for clients and advisors to forget the lessons of the past. As we approach this first anniversary, you can deepen your relationships with your clients by providing valuable insights and perspective on this topic.

TALKING TO CLIENTS ABOUT RISK

Helping your clients navigate their financial decisions and identify opportunities is all in a day's work for advisors, but one-on-one conversations to contextualize risk and frame key events have never been so important, whether the topic is inflation or market risk.

In the weeks and months following the collapse of SVB, as investors looked to protect their assets, many moved assets to the so-called systemically important financial institutions. But SIFIs are not without risk. A year ago, many worried about whether what happened to SVB could happen to Schwab.

Fifteen years ago, the collapse of Lehman Brothers also seemed improbable. Yet its failure is now regarded as a prime example of how the subprime mortgage crisis set off an explosive chain of events that would trigger a global market crash, and an important reminder that regulators may choose to save some institutions and not others. 

In reaction to the events of 2008, the Consumer Financial Protection Bureau was formed and reforms such as the Dodd-Frank Act were passed. But this didn’t prevent another 400 bank failures in the following three years. 

Putting clients’ money into money market funds was seen as a “quick fix” to the banking crisis of 2023, but black swan risk can be found everywhere. In March 2023, the US Commerce secretary said: “If there is any place where the vulnerabilities of the system to runs and fire sales have been clear-cut, it is money market funds.” 

Take time to speak to your clients about risk. Just as diversifying investments improves risk-adjusted returns, so does diversifying cash, by spreading it across multiple FDIC-insured institutions.

THE LESSONS OF SVB’S COLLAPSE

Helping clients understand complex issues is an important part of every financial advisor’s job. The SVB collapse may have been unique in terms of the concentration of its depositors and its loan portfolio in tech and biotech, but the broader lessons learned from 2023 include the importance of diversification, being smart by not exceeding the $250,000 FDIC limit, and thinking critically about liquidity and risk.

In response to last year’s banking crisis, many advisors worked with their clients to ensure they weren’t keeping all their eggs in one basket. One solution is to diversify cash by spreading it across multiple banks – either manually or through intelligent cash management platforms that can help clients maximize both yield and FDIC insurance coverage.

Some advisors pushed clients into sweep programs, also known as program bank solutions. But it’s imperative to read the fine print. With these products, a client’s money is pooled with others into an omnibus account, so if the program operator fails, the client can’t access funds or even contact the banks holding their money if there were to be another crisis. That could be a nightmare situation for any client (or their advisor). After all, what good is cash if it’s inaccessible when clients need it most?

Beyond liquidity, inflation remains a top concern of clients in 2024. Just as keeping funds invested and not being too reactive to market “noise” is important in a period of prolonged inflation, it’s even more important for clients to look at the interest rates they’re earning on their deposits. Many banks pay low interest, so there's a substantial risk the real value of your client’s cash is being eroded.

Advisors can help with these conversations by asking clients what they're earning on their cash, offering to assist them with options to earn more, and encouraging them to read the fine print, knowing the distinctions, for example, between a prime money market fund subject to greater risk versus FDIC-insured high-yield savings to store cash pending investment.

SUMMARY

The failures of SVB, Signature Bank, First Republic, and others in 2023 caused panic to ripple through the markets and raised awareness of FDIC insurance. But in 2024 clients still need to be reminded of the key lesson of a year ago: Don't keep all your eggs in one basket.

As an advisor, you can take this opportunity to deepen your relationships with clients, build trust, and grow your business by discovering held-away cash, which can help grow your AUM. 

As we approach the anniversary of the 2023 banking crisis, use this opportunity to talk to your clients about their cash and how to keep it safe and earning as much as possible. They will thank you for it.

Michael Halloran is head of business developments and partnerships at MaxMyInterest.