With the recent bank failures, what are advisors telling clients to do about their cash accounts?
Vance Barse, wealth strategist and founder of Your Dedicated Fiduciary in San Diego, said his phone has been ringing off the hook with clients who have two basic questions.
“Across the board, first they want to know about the solvency of the banking system and whether they need to be pulling money out of banks, and second they want to know what idiosyncratic event happened that put SVB in that position, what the administration’s response was, and whether that was appropriate,” he said, referring to Silicon Valley Bank, one of two banks that were recently taken over by federal authorities.
“With the information we have, we do not believe the situation is systemic,” said Brian James, a managing partner at Ullmann Wealth Partners in Jacksonville Beach, Fla. “We advise clients to keep any cash at banks at or below the FDIC limit. We also advise using a large institution with a solid reputation.”
The FDIC limit, of course, is $250,000 per person, though federal authorities have promised to make everyone who had accounts at the now-closed Silicon Valley Bank and Signature Bank completely whole no matter how big their accounts.
Jeff Mattonelli, an advisor at Van Leeuwen & Co. in Princeton, N.J., said he feels “encouraged by the government’s response in backstopping deposits of those over the FDIC insurance limits following the recent news [and] would expect a similar response if these issues continued and spread to other banks.”
Banks Are Generally Safe
Overall, advisors interviewed for this article are not panicking. “The information available to date does not suggest hiding money under your mattress,” said Greg O’Donnell, CEO and founder of O’Donnell Financial Group in San Rafael, Calif.
“To be clear, banks are generally very safe, especially the big national banks,” said Dean Catino, president and co-founder of Monument Wealth Management in Alexandria, Va. “However, people all have different levels of risk aversion.”
It’s important for clients to have their money in line with their comfort level, he added, if they want to “sleep well at night.”
Whatever a client’s comfort level, it would be foolish to do anything rash. “We’re presently facing a psychological hurdle as the public’s confidence has been shaken,” said Brian Mercado at JSF Financial in Los Angeles.
One way people who have more money in cash than the FDIC limit can still stay safe is to open accounts at multiple banks. “Since it’s important to have banking relationships, we’re advising [clients] to establish relationships with more than one bank and to stay under the FDIC limit,” said Mercado.
But that may pose other kinds of problems. “Managing several bank accounts is cumbersome and unnecessary,” says Brian Frank, CIO at Frank Capital Partners in Miami. “There are several money market funds that automatically diversify your cash across several banks, so no single bank would hold more than the $250k maximum.”
For couples, another option is to open a joint account, which is federally insured up to $500,000. If they also open separate accounts, they can be safely insured up to $1 million.
A third, less liquid option is to designate a beneficiary of the account. It could be an IRA account with, say, the spouse as beneficiary. Or it could be a trust account, with a revocable personal or family trust named as the owner of the bank account and multiple beneficiaries who will inherit the money after the account owner’s death. You’ll need a lawyer to set up the trust, but in general, the FDIC insures up to $250,000 for each beneficiary. So if one trust account has four beneficiaries, it’s insured up to $1 million.
How Much Cash On Hand Do Clients Really Need?
But how much cash do clients really need to have on hand anyway? Not surprisingly, the answer depends. “Each client has their own specific need,” James said. The amount depends on “short-term needs and having enough of a cushion to provide a psychological safety net,” he added.
To O’Donnell, it’s a fairly simple calculation. “The size of your portfolio and proximity to retirement will generally be the key guiding factors,” he said.
As a rule of thumb, Frank said “working-age clients should have minimally six months of living expenses in cash in case they become unemployed.”
For retired people, the need for liquidity is even greater. “We’re generally advising retirees to have enough cash on hand to meet operational needs—i.e., living expenses—for about two years,” said Mercado at JSF Financial.
“Think of liquidity in terms of number months to fund lifestyle and add an amount for short-term goals,” said Mallon FitzPatrick, a managing director and head of wealth planning at Robertson Stephens in New York. “A sufficient liquidity amount is unique to the client.”
Catino firmly recommends “about 12 months to 18 months of cash or cash alternatives,” he said. “We call it being ‘financially unbreakable.’”
It is, he said, it kind of “rainy-day insurance policy.” Better still, these days that money can earn a decent interest rate. “Currently, we are seeing 4% yields on certain money market mutual funds that invest in very short-term Treasuries,” said Catino.
Indeed, some clients may prefer moving money directly into short-term Treasury bonds or money market funds that invest exclusively in these securities. Six-month Treasuries are still paying about 5% (the rate was under 1% a year ago). They aren’t FDIC insured, but they are backed by the full faith and credit of the U.S. government. Furthermore, these securities might yield less than those in other money market funds, but they are not subject to state or local taxes, making them attractive to clients in high-tax states.
“Short-term Treasuries are a great place for cash over the FDIC limits,” said Frank.
The funds will be tied up for the life of the bond, but it will grow at a higher rate than a bank account would offer anyway.
Barse at Your Dedicated Fiduciary has been recommending laddering Treasuries since the Federal Reserve started raising interest rates early last year. He stacks three-month, six-month, and 12-month notes to allow a degree of flexibility as interest rates change. “So our clients aren’t new to the concept of T-bills,” he said.
But could the bank failures cause the Fed to stop raising rates, or even to lower them? At this point, Barse isn’t necessarily recommending clients move more assets into Treasurys. “That has to be evaluated on a client-by-client basis,” he said.
Van Leeuwen’s Mattonelli, though, remains open to bonds. With the current rates, he said, “it is certainly advisable to explore cash alternatives that are offering higher interest, as opposed to simply keeping cash in a checking account.”
Some Are Still Concerned
Despite all these reassurances, “some clients are still concerned,” said Paul Karger, co-founder and managing partner at TwinFocus, a Boston-based multi-family office for ultra-high-net-worth clients.
Many of his clients don’t keep a lot of cash in bank accounts anyway, he said, partly because, as interest rates were increasing over the past year, clients have been moving assets into Treasury ladders or institutional money market funds, he said. “It was a chase for higher yields,” he explained. “But as it turns out, it’s a safer place to keep extra funds.”
Nevertheless, clients keep asking if their brokers are okay, not understanding that brokers are different from banks, he said. There is less risk in keeping money at a broker-dealer or custodian such as Schwab or Fidelity, he said, because they don’t have “large lending books like a traditional bank [does], and they are not engaged in the same type of lending as many of the private banks like SVB,” he said. “Again, it’s about education. People are panicking and talking to taxicab drivers, [who] are telling them what’s going on in the financial system, and they really don’t know. And that just leads to further contagion.”
Brokerage accounts aren’t FDIC insured, but in the unlikely event that a broker goes bankrupt, there is still a degree of protection. “Remember, brokerage accounts are insured by the SIPC up to $250,000,” says Frank, referring to the Securities Investor Protection Corp.