As investors and financial advisors wait on the Fed to slash interest rates three times this year, experts say cash assets represent an attractive and often under-discussed opportunity.
Rising interest rates have pushed the average yield on money markets and other cash-equivalent funds above 5.1%, according to research firm Crane Data, the publisher of the "Money Fund Intelligence" report. Those returns remain much higher than the infinitesimal gains for clients in so-called sweep accounts that automatically generate big profits for many large wealth management firms on customer cash holdings, as well as the paltry yields on trillions of dollars in savings and checking accounts at the massive giants of the banking world. Last year's banking crisis also highlighted how diversification of cash holdings can provide more Federal Deposit Insurance Corporation protection in the event of an institution's failure.
To be sure, many investors are heeding those factors: Last year, assets in money-market funds jumped 22% to $6.36 trillion, according to the Fed. However, more potential landing spots for cash assets are hitting the market almost every day. Available research indicates that advisors may not be aware of the amount of clients' holdings in non-yielding accounts, suggesting that they could bring up the topic much more in client conversations. In addition, the Fed cuts expected to begin in June or July could open more windows for shifts in portfolios, depending on whether clients need access to cash for liquidity or see a chance for higher yield.
"Both advisors and clients need to be thinking more about how they're going to achieve income from their cash holdings. The way that we like to think about it here is really focusing on risk instead of just income," Ted Brooks, the chief investment strategist of Radnor, Pennsylvania-based Nordwand Capital, said in an interview. "You can find income, and you can find safety. For the first time in a long time you are actually able to hold cash and get a decent return out of it."
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High net worth clients have clearly noticed those possibilities, with a sampling of more than 3,100 investors from around the world telling the Capgemini Research Institute that they boosted their holdings in cash and equivalents by 10 percentage points year over year to 34% at the beginning of 2023. For understandable reasons, that largely came at the expense of equities and fixed-income assets, according to Capgemini's World Wealth Report.
"Rising interest rates and high inflation have made returns on cash and cash equivalents more attractive, and they are less risky," the report said.
Interestingly, though, more than 400 wealth and asset managers participating in a survey released last month by financial technology firm Flourish and Wealth Management IQ estimated that 7% of their clients' net worth was in cash. At least 95% of advisors described addressing cash as a professional responsibility, but only 5% said they were consistently raising the subject with all of their customers or discussing alternatives to non-yielding accounts such as money markets, treasury bills, certificates of deposit or other short-term investments.
"The vast majority of our deposits are still coming from checking accounts from large money- center banks that pay virtually zero. That can be a little hard at times for people who work in financial services to remember," said Ben Cruikshank, president of Flourish, which offers cash management to registered investment advisory firms through its Flourish Cash accounts. "Your clients have a lot of cash that is held away from you as an advisor and you as an advisor actually have a lot less visibility into that cash than you think."
And, as he and Adam Grealish, the head of investments for RIA custodian Altruist, both said, the Fed cuts won't completely wipe away the benefits of the higher yields.
Altruist launched Altruist Cash last week, offering gains of 5.1% and FDIC insurance through partner banks of up to $1 million for individual accounts and $2 million for joint ones. The Fed's decisions on rates could alter the yield over time, Grealish noted.
"Overall — even with the rate outlook as it sits today — three rate cuts still puts us in the mid-4% area," he said. "So this is still a place where cash is something that advisors and clients are thinking about and paying a lot more attention to and thinking about holistically."
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For advisors and clients who may wish to consider other choices amid the rate cuts, short-duration fixed income products like government and agency bonds or alternative investments such as collateralized loan obligations, closed-end funds, business development corporations or leveraged ETFs could be something to consider, Brooks said. Many clients have put 5% to 10% of their holdings in cash and 10% to 15% in fixed-income products, or up to 25% in bonds and credit-tied strategies, he said.
"That's a lot more than people were sitting in two or three years ago," Brooks said.
