InvestmentsAug 31 2012

Cash management: Back to basics

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Much has been said in the past few years about how the RDR will change the way financial advisers serve their clients, but little mention has been made of one essential service: cash management.

For the most part, financial advice has focused on investments, pensions, protection and mortgages, but when it comes to handling everyday banking and savings needs, much of it has been left to the client.

This could all change come the onset of the RDR. It is expected advisers will seek to enhance their offerings in order to take greater control of a client’s finances and deliver a higher service level.

Considering interest rates remain at record lows with little chance of increasing any time soon and savings rates at many high-street banks are negligible, receiving advice on how to handle cash appears more and more like a prudent decision for clients.

Research conducted by Investec Bank in March this year found that IFAs estimate their clients are earning just a 0.97% average return on cash held in tax-wrapped investments. About 14% figured their clients were earning less than 0.25%, while only 21% thought their clients were earning more than 1%. If ever there were an argument for advisers to steer their clients in the right direction, this would be it.

But few IFAs are actually involved in their clients’ cash-management process at the moment. The Investec research, which polled 100 IFAs about the way they handle their clients’ cash, found 78% of respondents spend 10% or less of their time handling the cash component of client portfolios, while 11% said they spend no time on it at all.

That said, more than a third said they would be able to expand the service they provide to clients if they had more access to cash deposits and other related products in wrap platforms, while 29% said it would help them offer a better service to risk-averse clients.

Cash management is something more familiar to high-end IFA firms and wealth managers at private banks, but for most firms it is a new consideration. At its most basic level, cash management involves reviewing a client’s current cash holdings, assessing their suitability and potentially redeploying funds to new accounts in order to maximise returns. For those wanting to provide a more rounded service to existing higher-net-worth clients, finding solutions for their basic banking needs and various cash holdings could be a worthy venture.

Forgotten asset

For many investors, cash and savings is something of an afterthought rather than a priority when developing a financial plan.

Lionel Ross, business development manager at Investec Bank, says cash is a “forgotten asset class” that is often ignored and left to sit in accounts that generate little or no returns. However, in the past two to three years he has seen increased interest for more cash options for wrap platforms and pension wrappers, particularly SIPPs and SSASs.

Similarly, Martin O’Hare, head of investment solutions at Signia Wealth, says cash is becoming more important in active asset allocation, although it can have both positive and negative effects. “Given the fact that cash rates are so low and expected to remain so over the next year, too much cash can act as a drag on portfolio performance,” adding that it can be used more tactically to protect client portfolios during periods of market stress.

Meanwhile, George King, head of portfolio strategy at RBC Wealth Management, says he has noticed more people talking about cash these days, most likely prompted by frustration with the way financial markets have performed in the past few years and fear of volatility that could cause investments to drop in value.

He says even though cash holdings do not produce incredible returns, it is necessary to have an allocation to this asset class, even if it dampens overall returns, because it will mitigate some downside loss when other asset classes perform poorly.

While cash is not normally part of the financial planning discussion for many wealth managers and financial advisers – particularly when a discretionary management portfolio is being deployed – King says it is still an important part of the equation. “Wealth managers need to put themselves in the shoes of the client and understand what their needs are, and a conversation about cash has to be part of that.”

Ross at Investec Bank adds, “If you’ve already got all the investment options, why not the cash deposits?”

Part of the value chain

Managing an average client’s current and savings accounts is not a task financial advisers see as part of the planning process; they would rather use the assets within them to invest elsewhere for potential returns.

The idea behind advisers’ greater involvement in cash management rests on their ability to provide a service that starts with the basics of banking and goes as far as setting up a series of savings accounts and long-term deposits with the best rates possible and then managing these on an ongoing basis.

Anna Bowes, director of Savingschampion.co.uk, a new firm that helps people manage their cash holdings, says there is a real demand among investors for this kind of service. “There is definitely an appetite for cash portfolios to be managed,” she says. “For whatever reason there are a lot of people holding cash, but it’s very difficult for them to know where to put it.”

In a world where there are scores of banks and building societies offering hundreds of accounts with different terms and features, having an adviser play a role in recommending where cash is held is something people are looking for, Bowes adds.

“People want help, they want to know where to put their money,” she says, adding many investors began to worry about their cash deposits as European banks showed signs of weakness and some people found their deposits were not always fully covered by the Financial Services Compensation Scheme (FSCS).

O’Hare at Signia Wealth says cash should not be ignored considering how significant it can be as part of a wider portfolio of assets. “Planning liquidity requirements and enhancing cash returns should form part of the discussions on general wealth planning, especially given many clients most likely have cash deposits at retail banks where rates are generally quite poor,” he says.

Peter Beavis, sales director at private bank Cater Allen, says advisers can become more involved in their clients’ cash holdings by offering more services in this area. Cater Allen has launched a cash-management service allowing advisers to manage a wide range of accounts clients may hold. The Cater Allen model, Beavis says, involves opening a ‘hub’ account from where client money can be shifted into other savings accounts or back if withdrawals need to be made.

He says the idea is for advisers to get involved in “idle pockets of cash” in order to squeeze more value out of savings during a time when interest rates are low and equity returns are flat.

Normally, Beavis says, the time when an IFA engages with a client is when there is money to invest. But he says offering a cash-management solution could actually generate money to invest that might not have been noticed otherwise. “By opening a client bank account, the adviser can collect cash in the hub and create an opportunity to invest, instead of waiting for the client to come to the door with a cheque,” he says.

Such a service is, in most cases, one for the higher-net-worth market, rather than the mass affluent. Because this requires cash-management software programs and a great deal of research to set up, not to mention the time spent monitoring it, most clients will only find these offerings in high-end IFA firms or the financial advisory departments in private banks.

Putting it into practice

Exactly how a cash-management offering takes shape is up to each financial adviser, whether it is simply recommending individual savings accounts and other cash solutions, such as structured deposits, or working with a private bank and using the accounts and savings options it offers.

Usually, an IFA will sit down with the client to find out their current affairs and then discover they have a large number of savings accounts scattered across several institutions, some of which they might have forgotten about because they were opened a long time ago when the interest rate was attractive. From here, the adviser can tidy up all the accounts by shifting money to those paying more interest.

At this stage it is necessary for the adviser to then figure out what the money is for, what sort of income is being generated, what the short-term financial needs might be and what sort of income will be needed a few years ahead.

From here, a range of short-term savings, fixed-term and structured deposit accounts can be set up, all designed to offer either easy access or locked-in terms to suit needs. It is a good idea to stagger fixed-term accounts so their maturity dates are always rolling over at regular periods. Any money not needed from these maturities can then be rolled back into another account.

An advantage of using a private bank account is that it is often possible to secure institutional rates from the various banks and building societies offering savings and term deposit products. However, in order to earn its margin, the private bank will take its share of a few basis points from the headline interest rate. While this will result in a lower return for the client, the boosted institutional rate should, in most cases, make up for it.

Bowes at Savingschampion.co.uk says her firm offers a free rate-tracker service for all bank accounts in the UK that publishes the latest rates in one place. In addition, her firm offers a concierge service for those with savings of £250,000 or more. With the concierge service Bowes’s firm ensures clients are earning the best rates on all their savings while also spreading clients’ cash across providers to make sure their savings are fully covered by the FSCS guarantee of £85,000 per banking licence.

While Savingschampion.co.uk is currently offering a direct service, Bowes is open to discussions with financial advisers who might be interested in recommending this to their clients.

Beavis at Cater Allen says his company’s hub account requires a minimum deposit of £2,500, from which deposited cash can then be moved into any other accounts considered suitable. While the private bank promotes its range of savings and term deposits to intermediaries, an adviser using the firm’s hub account is not obliged to use any Cater Allen products at all; it is completely open to the whole of the market.

Beavis sees the hub account as not only a way for advisers to easily move cash in and out of other deposits, but also a way to handle investment income and adviser fees. “This whole transition between coming from the product commission world to now charging the client may be a difficult conversation, so having the ability to take fees from outside the investment portfolio is one way to make it easier,” he says.

One firm that has already put the Cater Allen system into practice is Jonathan Fry, having rolled it out to clients in early 2010. The company’s Dynamic Cash Management service uses a hub account where money is deposited and then spread to different institutions seeking the best savings rates and credit ratings. The minimum investment is £100,000 and the firm charges a fee of 30 basis points to constantly monitor rates and make sure client money is optimised.

Options to consider

King at RBC Wealth Management says there are several ways to deploy cash depending on each client’s needs. He said in 2011 concerns started to mount over systemic issues with some cash holdings, particularly money market funds, saying they have not always been a very good cash option.

Term deposits are a good way of holding cash in order to get hold of better rates in the market, although this means locking money in for a specific period and losing liquidity, he says.

In addition, there are also structured deposits, which King says are appropriate for a group of clients with the right set of circumstances. “If I’m comfortable with the underlying and the counterparty, and if I’m comfortable with the issuer, then why not invest in a structured product if you don’t mind locking in for the investment term?” he says. While many advisers use wraps and platforms to consolidate a client’s assets into one place, where they fall short is on the cash-management side. While cash funds are available on many platforms, structured deposits are available only on a few and term deposits and other savings accounts receive little to no attention.

Gary Dale, head of sales at Investec Structured Products, says there has been increased interest in cash in the past 18 months and structured deposits are among those options offering full FSCS coverage in addition to higher rates than the average savings account. Currently, structured deposits are being offered at slightly above the 5% return mark, which Dale says is the threshold for attracting investors. Below this mark, business volumes are much lower, he says, as clients view the returns as less attractive given the investment term involved.

Over at Cater Allen, Beavis says the idea of opening a hub bank account is to give the adviser a place to deploy cash in whichever way it is needed. But one shortcoming here is the lack of compatibility with platforms. While the term deposits from many providers can be found here, not everything can be consolidated into a single view.

Adviser reticence

Despite private banks and high-net-worth wealth managers being prepared to manage clients’ savings accounts, it might be a while before the wider advisory world embraces the idea of cash management as a service to offer clients.

Gavin Jones, chartered financial planner at Old Mill, says this is an area that would require client segmentation in order to pick out those who would be able to make the most of it and those who would find it unnecessary. For the most part, he says this is something that would suit a high-net-worth client with at least several hundred thousand pounds sitting in cash.

“It could be an advantage for some of our clients, but for every one that does use it, there is another who is going to be happy with their existing banking relationship,” he says.

In fact, Jones says his firm looked into developing a cash-management service in 2006 but did not find enough good reasons to do it. On the one hand, Jones said his firm turns to private banks for many services, such as lending, but when it came to savings products he was not convinced. “When it came down to it, players like ING came in and their rates were higher than their competitors,” he says.

Meanwhile, Shane Mullins, managing director of wealth management firm Fiscal Engineers, says cash has always been a difficult part of financial planning. “Cash is almost the trickiest asset class to manage because there’s almost nothing you can do to enhance returns,” he says, adding that deposits paying higher rates come from companies that have to pay increased rates because they have balance sheet problems.

Mostly, Mullins questions the value in handling banking and savings accounts for clients given the amount of work necessary for a relatively small return. He also said the margins for wealth managers would be modest. “It’s an incredibly thin margin so you have to question what you’re offering to a client, what the service is and where the value lies in that,” he says. “It’s difficult to offer something compelling by taking a margin somewhere and offering them a lower one in return.”

Furthermore, the process of collating data and keeping track of rates is time-consuming for those who manage cash, says Mullins.

King at RBC Wealth Management understands why many advisers will not be turned on by the idea of cash management, saying, “The bread and butter business of having a current account and chequeing account is different to people’s real wealth, so IFAs will likely not want to get involved.”

What might be a major stumbling block for many firms is the initial work involved in researching and setting up the savings accounts. While wealth managers and private banks may already have the cash- management software tools to handle this, a smaller firm might not. Once the groundwork has been completed, however, the process of ongoing management and advice is straightforward and can be an extra service that comes with the fee or retainer charged to the client.

King at RBC Wealth Management says it might be time for wealth managers to realise all these issues can be connected in order to maximise returns. Of his own firm’s offerings, he says, “We recognise that if you’re going to be a relatively full-service provider, a client will have certain needs,” which for King also includes access to bank accounts and other cash-management facilities.

Beavis at Cater Allen, meanwhile, says cash management is something to offer in light of the new regulatory landscape. “In the post-RDR environment, where it’s a service-led proposition instead of commission-led or product-led, IFAs can offer greater service and opportunity for their clients,” he says, adding the only way to make it work effectively is through a fee-based advisory service.

Breaking new ground

The idea of cash management may not have been on advisers’ minds in years gone by, but all of the talk right now suggests it could become a cornerstone of many business models after the RDR. This is because, in a fee-driven world, it will be necessary to offer as many services as possible to keep clients happy and compete with other firms. In the high-net-worth category, clients may ask a lot of their IFAs, so being prepared to manage their cash holdings, which can measure in the hundreds of thousands of pounds, is essential.

Given the fact interest rates are low, having the ability to seek out the best offers in the market and maximise returns on cash can only be good for the client. The question, of course, is whether the cost and time involved in managing these accounts matches the returns they generate.