Higher yields on cash give advisers another asset allocation tool

It's possible cash could turn out to be the best-performing asset class in 2022, which means some challenging conversations and asset allocation strategies for financial advisers and their clients.

While yields on cash accounts hovering near 4% provides a silver lining to the general economic malaise of the past few years by giving savers something for their idle cash, it hasn’t yet convinced everyone that a better-yielding form of safety is the best short- or long-term play.

“I do not recommend more than 1% in cash, and I typically have less than that,” said Kashif Ahmed, president of American Private Wealth.

“Historically and recently, cash has paid nothing and even now while it pays a lot more, it's still not justifiable especially if the account has an advisory fee levied on it,” Ahmed said. “Of course, if the client anticipates a cash need in the near term, then we hold more for that specific need.”

Paul Schatz, president of Heritage Capital, isn’t jumping into the higher yields by adjusting his clients’ cash allocations beyond the normal three to six months’ worth of emergency funds, because he isn’t convinced cash is the best option in this market environment.

“We will opportunistically raise and lower cash levels throughout the investing cycle, but I see more opportunities than at any time since the fourth quarter of 2008, so I find it hard to hold lots of cash right now,” he said. “Even if I am right and a recession comes in 2023, bonds will offer an even better risk/reward.”

But stiff-arming the higher yields on cash in exchange for a higher risk/reward scenario could become less appealing as the Federal Reserve continues to push rates higher in an effort to tamp down inflation.

“I think high rates are here to stay for a while,” said Gary Zimmerman, chief executive of the cash management platform MaxMyInterest.

Zimmerman said the past decade of below-normal interest rates and cash yields stands in stark contrast to the current market. He believes that the future will bring a reversion to “more normalized” higher interest rates and that the Fed is not done raising rates yet.

Zimmerman cites the monetary and fiscal policies of the past few years as hard numbers that can’t be ignored.

“During the pandemic, the government printed around $5 trillion worth of new cash, and when you mail out checks to 100 million people that money has to go somewhere and the result is inflation,” he said.

With government stimulus programs increasing the money supply by 38% in two years, driving bank deposits to $18 trillion from $13 trillion, Zimmerman sees more work ahead for the Fed to “catch up to the money supply.”

“Absent a severe recession, it’s hard to see a scenario where the Fed reduces rates,” he said. “Typically, rates exceed the inflation rate, otherwise you’d have a negative return on cash. That suggests a long way to go before Fed can start moderating rate increases.”

Frank Bonanno, managing director at StoneCastle Cash Management, agrees that the “inflation tail will continue to wag the Fed” for a while.

“Financial advisers again need to assess how this affects client portfolios at least in the short term and where to find opportunity,” he said.

Bonanno described the mountains of cash sitting outside of portfolios managed by advisers as “lazy cash” that can “languish for years earning little to nothing and is many times uninsured.”

“It behooves advisers to address this indolent cash and create value by helping clients safely earn, insure, and save more and lessen the effects of diminishing purchasing power and higher inflation,” he added. “Cash earning 0.5%, can easily be turned into 4%."

Chuck Failla, founder of Sovereign Financial Group, recognizes that even if clients are banking emergency cash reserves, most are sitting on some kind of cash and he believes advisers can add value by fleshing out extra yield for clients.

“The problem is inertia; many clients will not take the time to sign up for one of the higher-yielding online savings options, which tend to have the best rates,” he said. “Over the past few years, however, there have been a number of cash management solutions available for advisers to choose from. The advantage with these is that the adviser can do most of the legwork for the client to get the account established and funded and that, of course, will lead to greater adoption and more yield going to the client.”

Marisa Rothstein, lead adviser at Siena Private Wealth, expressed similar sentiments.

“Wherever possible, I am taking advantage of prime money market funds on whichever platform my clients’ assets are custodied and yielding up to half a basis point more than the standard retail money market funds,” she said.