AssetMark: The Art of Effective Cash Management

(AssetMark) In the world of finance, the spotlight often falls on investments like stocks, bonds, and real estate. While these assets undoubtedly play a significant role in building wealth, one crucial aspect often overlooked is cash. Contrary to popular belief, cash is far from a stagnant, idle resource. In fact, it plays a vital role in helping clients achieve their financial goals.

Welcome to our comprehensive guide on cash management, where we explore the pivotal role cash plays alongside a well-rounded investment portfolio. From recognizing common mistakes in cash allocations to exploring different cash vehicles, we aim to empower financial advisors and high-net-worth individuals with the knowledge that will help them make informed decisions, optimize their cash holdings, and seize new opportunities.

As we navigate through the intricacies of cash management, we'll discover how to strike a balance between liquidity, risk, and return. Through sample scenarios and insights from industry trends, we'll learn how financial advisors can tailor cash allocation strategies to cater to the unique needs and aspirations of high-net-worth individuals.

Whether you are a seasoned financial advisor or an astute investor, this guide will help unlock the potential of cash and transform it into a valuable asset that can enhance financial security and build a stronger foundation for achieving short- and long-term goals.

Why Cash Matters

Helping clients manage their cash is a great way to improve your client’s financial outcomes, deepen your relationship, and grow your business.

Why Engage With Cash?

It’s a significant holding. For the average client, cash makes up a significant part of their financial holdings. According to Cerulli¹, 7-20% of holdings were allocated to cash and individual bonds for the average client in 2021.

It’s especially important to high-net-worth clients. Cash allocations typically increase with wealth due to investments in non-liquid assets (ex. real estate, alternative investments, etc.) and a greater focus on opportunistic investing requiring dry powder. The average high-net-worth (HNW) investor had a 34% allocation to cash in 2022 according to KKR’s 2023 Family Capital Survey.

It’s competitive and highly mobile. Cash is less sticky than other asset classes and can be transferred most anywhere within days. Banks and investment firms regularly prospect on cash hoping to win the cash and cross-sell investments. Helping your clients manage their cash helps win new business AND protects you from competitors looking to take your clients.

It helps your clients take advantage of time-sensitive opportunities. HNW investors often engage in sophisticated investment strategies and have access to exclusive opportunities that require readily available funds. A well-managed cash allocation can provide them with the dry powder needed to capitalize on time-sensitive investments.

The opportunity is large. Advisors can get an extra 7-20% of assets under management without taking on new clients when they help clients with cash-based investing strategies¹. Helping clients manage their cash is a clear win-win for both you and your clients.

The opportunity is now. Fed rates are at their highest levels since the .com bubble 20+ years ago. US commercial bank deposits hit $17T+ by February 2024, with many balances paying low interest rates.

How Advisors Can Demonstrate Value and Help Clients

Helping clients manage their cash is a great way to improve their financial outcomes and demonstrate your value. Many advisors add value by advising on:

• The amount of cash to hold: Many clients hold too much or too little and both can have negative consequences for the client.
• How to hold cash: Many clients default to bank deposits at traditional banks that often pay a really low rate. There are a variety of vehicles from bank to short-term investments that may better meet a client’s needs and still provide easy liquidity as needed.

 When advisors add value by advising on cash, the results can lead to:

• Improved financial outcomes: Avoid liquidity crunches (from too little cash), cash drag (from too much cash), and optimize for safety. Especially for HNW and UHNW clients, larger estates and more complex financial situations require increased agility to preserve wealth while optimizing returns.
• Increased confidence: Helping clients with their cash can have a material impact on client’s financial outcomes, their confidence in their finances and in you as their trusted advisor.

Types of Cash Buckets

There are three distinct types of cash buckets: Everyday Cash, Savings Cash, and Investing Cash. Each serves essential purposes in financial planning. Understanding the roles and recommended allocation for each cash bucket empowers investors to make informed decisions that align with their financial goals and risk tolerance.

Everyday Cash Bucket

Everyday Cash refers to the cash that individuals keep readily available for immediate living expenses and other day-to-day needs. This type of cash plays a vital role in financial planning as it ensures easy access to funds without the need for liquidating investments or incurring debt.

• Description: Everyday Cash provides individuals with the necessary funds to cover routine expenses such as groceries, utility bills, transportation costs, and other immediate needs.
• Typical Products and Evaluation Criteria: For Everyday Cash, individuals typically utilize checking accounts as they provide both security and easy access to funds. These accounts should be secure and insured by the appropriate government agency, ensuring protection against loss.
• How Much Everyday Cash to Hold: Determining the appropriate amount of Everyday Cash to hold depends on an individual's monthly living expenses and the level of comfort they desire in their financial cushion.

Savings Cash Bucket

Savings Cash represents cash and short-term investments held as an emergency fund or for near-term expenses and investments. Unlike Everyday Cash, Savings Cash is aimed at longer-term planning (often up to 24 months in the future), providing a balance between safety, liquidity, and moderate returns.

• Description: Savings Cash typically serves as a financial buffer to cover unforeseen events such as medical emergencies, job loss, or unexpected repairs. Additionally, individuals use Savings Cash for planned large expenses in the short to medium term, such as vacations, home improvements, or purchasing a vehicle.
• Typical Products and Key Criteria: Generally, products for Savings Cash include High-Yield Savings Accounts (such as High Yield Cash (HYC))*, purchased money market funds, certificates of deposit (CDs) or individual bonds with short maturities. Advisors should help clients prioritize products to meet liquidity and safety needs first before considering a potential return.
• How Much Savings Cash to Hold: The amount of Savings Cash to hold varies based on an individual's financial goals, risk tolerance, and lifestyle. As a general guideline, most financial advisors recommend maintaining an emergency fund with at least three to six months' worth of living expenses. For individuals with more volatile incomes or uncertain job prospects, holding up to a year's worth of expenses in an emergency fund may be prudent. Any planned cash outlays within the next 24 months that are necessary or important to an individual should be held in cash or investments with a low risk of loss.

Investing Cash Bucket

Investing Cash represents the cash allocation within a long-term investment portfolio. Investors seek market-based yields with an emphasis on safety and liquidity, allowing them to capitalize on investment opportunities and optimize returns.

• Description: Investing Cash forms an integral part of a long-term investment strategy, providing individuals with the ability to capitalize on market fluctuations and make strategic investment decisions.
• Typical Products and Key Criteria: In addition to Savings Cash products, Investing Cash may also include short to intermediate term bond funds, managed accounts, and other market-based instruments. Advisors often prioritize higher yields and are willing to take on a little more risk and less liquidity.
• How Much Investing Cash to Hold: The amount of Investing Cash to hold depends on an individual's risk tolerance, investment goals, and the current market environment. Financial advisors typically recommend a cash allocation of 2% to 20% of the total investment portfolio. Investors with a higher risk tolerance and a preference for aggressive growth strategies may opt for a lower cash allocation, while those with a more conservative approach may hold a higher percentage of cash in their portfolio.

By understanding the distinctions and purposes of Everyday Cash, Savings Cash, and Investing Cash buckets, financial advisors and investors can together optimize their cash management strategies to align with their financial goals and risk tolerance. A well-structured cash allocation aims to provide a balanced approach to enhance financial security and maximize investment potential.

Cash Vehicles Overview to Optimize Client Holdings

When it comes to cash management, finding the right balance between liquidity, risk, and return is essential. Different cash vehicles offer different characteristics, allowing investors to tailor their cash allocation to align with their unique financial goals and risk tolerance. By understanding the characteristics of various cash vehicles, cash holdings can be optimized more effectively.

Savings Accounts and High Yield Cash

Description: A bank deposit that earns an interest rate, often with the convenience of same or next-day access.

• Liquidity: Highly liquid, providing easy access to funds when needed.
• Risk of Loss: Virtually no risk of loss as it is typically insured by the FDIC.
• Return: Average interest rate of 0.25%², which is usually fully taxable.
• Tax Treatment: Fully taxable as ordinary income.

Purchased Money Market Funds

Description: Mutual funds that invest in very short-term bonds, offering quick access to funds while potentially yielding higher returns.

• Liquidity: Next day access to funds, providing a quick and convenient cash alternative.
• Risk of Loss: There is a minimal risk of loss due to market fluctuations.
• Return: Average returns range from 4.5% to 5%, with tax treatment varying based on fund type.
• Tax Treatment: Prime funds are usually fully taxable as ordinary income. Treasury funds are exempt from state taxes. Municipal funds are typically tax-exempt from income.

CDs (Certificates of Deposit)

• Description: Termed bank deposits with varying maturities ranging from 1 month to 36+ months.
• Liquidity: Liquidity is limited until the CD reaches its maturity date.
• Risk of Loss: Minimal risk of loss, with principal typically insured up to the FDIC limit.
• Return: Varies based on the term and prevailing interest rates.
• Tax Treatment: Fully taxable as ordinary income.

Treasuries

• Description: Bonds issued by the federal government with varying maturities, offering a highly liquid market for buying and selling bonds.
• Liquidity: High liquidity as treasuries can be sold before maturity if needed.
• Risk of Loss: Low for short maturities; value may decline if interest rates rise.
• Return: Varies based on prevailing market yields and the term of the bond.
• Tax Treatment: Federal taxes are applied, but they are exempt from state and local taxes.

Managed Portfolios

• Description: Bond mutual funds, ETFs, or managed accounts that provide professionally managed investment options.
• Liquidity: Typically have a trade settlement period of two business days for redemptions.
• Risk of Loss: Similar to other bond investments, with varying degrees of risk depending on the underlying bonds.
• Return: Varies based on the fund's performance and the composition of the managed portfolio.
• Tax Treatment: Varies depending on the fund type and holdings within the fund.

By leveraging the liquidity, risk, return, and tax implications of different cash vehicles, financial advisors can assist their clients in making strategic decisions to enhance their cash management strategy and achieve their financial objectives effectively.

Sample Scenario: Optimizing Cash Allocation*

Let's consider the case of a single client, Ms. Jane Doe. She currently holds $1 million in savings in a traditional bank account earning a 0.59% interest rate.

Conduct an Initial Discovery

As her financial advisor, you conduct a thorough discovery conversation to uncover Ms. Doe's plans and intended use of the funds. During this process, you get a clearer understanding of her financial goals:

• Emergency Fund: Doe desires to maintain an ongoing emergency fund of $125,000 to ensure financial security during unexpected situations.
• House Improvements: Within the next 12 months, Ms. Doe plans to invest $125,000 in renovating her home to enhance its value and comfort.
• Real Estate Purchase: Over the next 12 months, Ms. Doe intends to allocate $250,000 toward the down payment for a real estate investment opportunity.
• Potential Investment: In the next 12 to 18 months, Ms. Doe aims to invest $500,000 in a potential investment opportunity that aligns with her risk tolerance and financial objectives.

Offer a Tailored Strategy

​​To meet Ms. Doe’s needs, you first focus on when the funds will be needed and the appropriate risk level. Then, you find vehicles with competitive returns within the parameters of timing and risk assessment. Based on Ms. Doe's specific needs for safety, liquidity, and potential return on his cash, you propose a cash solution like the following:

• Emergency Fund: Allocate $125,000 to a High Yield Cash (HYC) account, which provides quick and convenient access to funds with a competitive interest rate of 3.5%. This ensures that Ms. Doe's emergency fund remains readily available while earning a more favorable return compared to her traditional bank account.
• House Improvements: For the $125,000 earmarked for house improvements within the next 12 months, recommend placing it in a High Yield Cash (HYC) account with a 3.5% interest rate. This allocation allows Ms. Doe to access the funds promptly when needed for home renovation while earning a higher return.
• Real Estate Purchase: Allocate the $250,000 designated for the real estate purchase over the next 12 months into a High Yield Cash (HYC) account with a 3.5% interest rate. This allocation ensures that the funds remain liquid and readily available for the planned real estate investment.
• Potential Investment: To meet Ms. Doe's need for safety and liquidity while maximizing potential returns, suggest investing the $500,000 in a Laddered Short-Term Treasuries fund. This investment option provides higher returns, with a yield to maturity of 5.2% (net of platform and other advisory fees), and the flexibility to access the funds within the intended 12 to 18 months timeframe.

Oversee Client Benefits

You outline your reasoning for the tailored strategy, so Ms. Doe can understand what to expect and feel confident in the plan. As a result of this optimized cash allocation strategy, you tell Ms. Doe you believe she will benefit in the following ways:

• Access to Funds: Doe can access the allocated funds precisely when she needs them for her different financial goals, ensuring a seamless cash flow.
• Increased FDIC Insurance Coverage: Due to HYC’s extended FDIC coverage, Ms. Doe's FDIC insurance coverage increases from the standard $250,000 to $500,000, enhancing the safety of her deposits.
• Enhanced Returns: Compared to the 0.59% interest rate in her traditional bank account, the optimized cash and investment allocations yield an overall return of 4.35% annually, translating to an increase from $5,900 to $43,500 per year. This substantial improvement in returns allows Ms. Doe's cash to work harder for her financial goals.

Carefully aligning your plans with Ms. Doe's unique financial objectives leads to a tailored cash allocation strategy that optimizes liquidity, security, and potential growth. Additionally, your approach sets the stage for a lasting relationship that minimizes the competition and earns referrals.  

Provide Pivotal Cash Strategies to Your Clients

In the dynamic landscape of finance, cash management emerges as a pivotal element in creating a well-balanced and prosperous investment journey.

By understanding the unique roles of Everyday, Savings, and Investing Cash, investors can leverage these cash concepts to create custom solutions to meet their client’s unique needs.

Moreover, we have examined various cash vehicles, each providing different degrees of liquidity, risk, and return. Armed with this knowledge, financial advisors can guide their clients toward optimal cash strategies tailored to individual financial objectives and risk tolerance.

Would your clients benefit from a more robust liquidity strategy? Our team of experienced consultants is here to support you throughout this journey.

Together, we can build robust cash allocation plans that contribute to your clients' financial success and peace of mind. Contact us today for a collaborative discussion and take the first step towards optimizing your clients' cash management strategies and securing their financial future.