Let’s talk about money

Jon Cudby: Can cash holdings really offer anything more than a safety net to offset more high-risk investments, and do they need to?

Peter Beavis: Yes I think they can. I think there is a general lack of awareness that there are a range of different cash vehicles, which can support enhanced interest rates over various periods of time. And the accessibility of these is now much greater than it has traditionally been, so certainly from Cater Allen’s perspective we see this as the forgotten asset class, which could very simply add value to clients’ portfolios and income streams.

JC: Adrian, in terms of your clients, do you think they would understand the demand for anything beyond a simple bank account, like structured deposits or any other vehicles out there?

Adrian Lowcock: The thing is, you’ve got to look at what you’re using cash for. So if you’re using it in a portfolio and it’s a strategic allocation and you don’t want to invest in particular portfolios, then you can use different vehicles; you can use structured deposits, zeros, even short-dated high-yield bonds or corporate bonds. But when you’re looking at where cash plays a role, it’s not just a case of having cash in a portfolio, you also need to be able to have a cashflow, particularly as more and more people are seeking income from their portfolios.

JC: Do you think they can offer something that traditional investment vehicles – say a money market fund or cash fund – can’t offer to an investor?

Nick Rice: Absolutely. Cash is really the ultimate safe haven and I think we have to look at cash in the context of the fact that, particularly after the financial crisis, the number of safe havens for clients’ money is diminishing. For instance, government bonds, which were traditionally considered a very important safe haven, now look very overvalued. But also if you have exposure to cash, like with any investment, you want to have diversified exposure and that’s where I think cash management comes into play.

JC: Is there a worry that, post-RDR, fee-based advisers are not going to be able to convince clients that cash management is a service that’s worth paying for, considering the returns are going to be lower than the headline-grabbing rates of more high-risk investment vehicles?

PB: The great thing about cash deposits, from my perspective, is that they are very visible; you can see very easily and very simply the rate of growth being attached to a given deposit. So, from a client’s perspective, it’s simple to work out whether there is a value gain or not. The other part is that it won’t necessarily have to be the adviser that is undertaking this work. A lot of the work will take place in the back office, and therefore the costs of the back office will be lower than perhaps employing an IFA to undertake that work.

AL: I think that’s a good point: if you’re an IFA giving advice to the client, you’re looking at the whole thing holistically. So when they’re charging, they’re not necessarily charging fees for the cash- management account, it’s for the whole solution that covers it, so the costs aren’t attached just for the cash element.

JC: A lot of the more established investment vehicles will be available through platforms, but that’s not going to be the case for a lot of cash management – is that sort of unavailability going to be a hurdle at all?

AL: I think it’s going to be a challenge. I think post-RDR you might see things increase and we have seen a lot of platforms offer their own cash-management solutions. The other way you might do it is, when we run discretionary portfolios we hold the investments on one area and we can then chop around with the cash element within the wrappers elsewhere. So you don’t have to use a platform to hold cash, you can perhaps hold a bit aside. That then goes back to what are you using the cash for, because different pots will have different money and you want different levels of accessibility.

PB: And it’s interesting actually because if you look at the wrap population, most of those have actually adopted term deposits as a standard item. Where you run into difficulty is with the traditional fund supermarkets, because they are wholly wedded to OEICs or unit trusts and don’t provide the functionality for that. So you can, for example, access most of Cater Allen’s deposits through the well-known wraps without too much difficulty. What you can’t necessarily do is get the fluidity that you would create by having the client bank account and then the ladder of different term rates that could be operated. We’d like to get there but it’s going to take us time.

JC: Do you think it’s up to those traditional platforms to adapt themselves?

PB: I think it’s horses for courses, I really do. Do I see fund supermarkets moving? No I don’t necessarily think that will happen. They are going to be very much more wedded to the cash fund approach. Probably the key driver from the IFA perspective is our ability to pull this together through the back-office systems because that’s where the reports, the aggregations, where the functionality is. And this is also because RDR is going to be about saving costs; it’s not just about a transition to a fee-based world, it’s about making sure that businesses are run very smoothly.

JC: Nick, you’ve alluded to there being fewer safe havens, but do you think there is a general mistrust of investment vehicles that is fuelling a demand for something less sexy but more secure?

NR: There is a mistrust, I think, of some traditional investment vehicles at the moment, but I don’t think that’s going to last forever and I think when that does change there will be big shifts out of things like government bonds and perceived safe havens into other more risky, more attractive, more high-yield investments. And cash is going to start looking like the only true safe haven in my opinion.

AL: I think the thing that investors have to be careful of, and IFAs have to be careful of, is that cash has a sort of safe haven status in the short term but it does depend on what account you go into because in the long term [the value of cash] could be eroded by inflation. And this is where cash- management accounts actually come in, because instead of being in a bank account on a deposit rate of 0.1% or 1% or whatever it may be, you can actually look for more competitive rates. So we see a demand for good cash rates but also inflation-proofing income as well.

NR: The trouble with cash is it does offer very low yields no matter how well it is managed. However, its attraction as a safe haven, I think, is indubitable.

PB: I absolutely agree that you need to have it in a fluid enough state to move it into the market when it’s appropriate to do so, but then that comes back to the whole cash management thing; making sure that you have an apportionment of cash held for the right term in the right place in the right accounts.

AL: One final thing, I think, is that when you’re looking at an investment, particularly cash, it’s not always about making a profit, it can be about avoiding a loss. They [institutions] are not particularly paying out great rates but it’s better than some other products out there.