Recent turmoil in financial markets, spurred by the failures of Silicon Valley Bank (SVB) in California and Signature Bank in New York, are making many clients increasingly nervous. Advisors keep trying to find new ways of telling clients to remain calm.
“In most instances, clients shouldn’t make any drastic changes to how they’re managing their cash and liquid savings,” said Russ Thornton at Atlanta-based Wealthcare for Women. “However, it’s important for them to understand how things like FDIC and SIPC coverage work and the corresponding limits of coverage.”
The Federal Deposit Insurance Corp., established in 1933 during the Great Depression, protects accounts of up to $250,000 at all U.S. banks. The Securities Investor Protection Corp., launched in 1970, protects investment accounts of up to $250,000 from bankruptcies at all SEC registered brokers and dealers and most National Association of Securities Dealers members.
“Investors with higher balances at banks can elect to sweep excess cash into third-party Treasury money market funds,” said David James at Coastal Bridge Advisors in Los Angeles, referring to money market funds from brokerage firms that hold federal bonds and are, therefore, backed by the full faith and credit of the U.S. government. Such non-bank accounts, he said, would be “separate and independent of any receivership in the event the [client’s] regional bank fails.”
In addition, in the wake of the recent failures, the Federal Reserve created the Bank Term Funding Program (BTFP), which provides extra liquidity to any depository institution in the U.S.
“These changes are implemented to allow depositors to have confidence that they will have access to all of their deposits, therefore nullifying any need for a ‘run on the bank’ scenario,” said O. Emerson Ham III, a senior partner at Sound View Wealth Advisors in Savannah, Ga. “We feel that these actions should rebuild confidence in the banking and financial system.”
Furthermore, some advisors reassured clients by pointing out that not all banks are like those that failed. “SVB was overweight in investments that would not pass the stress test,” said Don Grant, principal and advisor at Sabre Wealth in Wichita, Kan. “That is not the case for most regional banks.”
Reality and perception are two different things, though. “Social-media frenzy added to the run on SVB’s deposits,” added Grant. “Keep your cash where it is—in the bank—and don’t become part of the problem by panicking and pulling it out. There is probably more of an opportunity to lose your money if you try to store it at home than if you leave it in the bank.”
In a sense, it’s a case of a few bad apples, another executive said. “The recent bank failures are not an accurate representation of the financial sector,” said Chris McMahon, CEO of Aquinas Wealth Advisors in Pittsburgh.
Another contributor to the problem may be an excess of cash accounts. Higher interest rates and stock market volatility have caused some people to rely more on banks than they used to. “For most of the past decade, it didn’t really matter where you held your cash reserves, as the rates … were close to 0%,” said Brian Leslie, a director of financial planning at Edelman Financial Engines in Omaha, Neb.
Now it’s a different story. “People are sitting on cash like they never have before,” said Skylar Riddle at Fort Pitt Capital Group in Pittsburgh. “From the stimulus money to the uncertainty in the stock market, cash holdings are high compared to other time periods.”
Most people don’t need more than a year’s worth of cash in savings accounts or money market accounts, he said. “Money that you need over the next two to five years should be in high-quality bonds, which will pay you interest and give you the principal at maturity,” said Riddle. “Any money beyond that might provide better returns by being invested.”
Some people keep a degree of cash “that is not needed for current bills [but satisfies] the asset allocation in their financial plan,” said Andrew Gardener, president of Tanglewood Legacy Advisors in Houston. “It may have no specific purpose other than to generate some income while reducing the volatility of your portfolio.” This portion of cash savings, he said, can be invested in Treasury certificates of deposit, “which are currently generating much higher yields,” he said.
Of course, how much cash to keep available depends on individual circumstances. “Some of my women clients feel more comfortable with a year of expenses in a bank account that is easily accessible,” said Cary Carbonaro, senior vice president and director of Women and Wealth at Advisors Capital Management in Orlando, Fla. “If you are retired and have pensions and Social Security, you might even need less because that should be guaranteed income.”
But don’t take a lot of chances, other advisors caution—at least not under current circumstances. “Given our economy is on the verge of a recession and the labor market may cool, I would highly recommend clients be conservative,” said Eric Sterner, CIO at Apollon Wealth Management in Charleston, S.C.