Over the course of their lives, your clients will encounter a variety of cash-liquidity events that need to be managed effectively. These events include house sales, equity release and pension drawdowns, to name but a few.
Very often, clients don’t want this cash to be tied up in other asset classes. For example, would a client ever want to use equities to manage a pool of funds designated for care home fees? However, if assets are held as cash, it is critical to ensure it is actively managed to maximise return and minimise risk, and that the adviser has an objective overview of the client’s whole portfolio.
The main barrier to effective cash management is inertia. This is evident in individuals managing their cash portfolio as well as businesses, charities, pension funds and client money accounts. The sheer hassle and pain of opening multiple bank accounts, and then the ongoing management of those accounts to continue to get the best interest is, for many people, a very poor use of time. It’s on everyone’s to do list, but it never gets done.
A trillion pound opportunity
The numbers involved and the corresponding opportunity is staggering. Total cash savings in UK banks are estimated to be approximately £1.5trn, of which individuals account for around £700bn.
With these funds currently languishing in low interest accounts with uncompetitive rates, an additional 1 per cent of interest earned would generate an extra £15bn of interest income. This would improve the savings ratio, tax revenues and GDP growth.
The top five banks hold the majority of cash and 80 per cent of individual accounts have not switched in last three years.
Instant access accounts hold approximately £354 billion and the majority pay less than the Bank of England (BoE) rate. Cash held at banks by the top 5,000 charities in 2016 totalled £15.5bn and earned little or no interest. An extra 1 per cent interest on this figure would generate an extra £155m of charitable income.
Drivers behind active cash management
| Tailwind | Comment |
| FCA 2015 report on Cash Savings 1 | The report references a lack of transparency, inertia and difficulty in switching accounts while a small number of large banks dominate and therefore can pay low rates. |
| Payment Service Directive v2 (PSD2) | Allows greater payment and account information to flow into and out of our financial service providers |
| Application Programming Interface (API) | PSD2 executed through APIs, which are a set of functions and procedures that allow the creation of applications that access the data of an operating system, application or other service |
| Increased banking competition | Increased banking competition is driving the necessary savings products capacity to provide clients with a more attractive and diverse product range. |
| Quantitative easing unwind | The Bank of England’s Scheme Term Funding Scheme ends on 28 February, and UK banks will need to replace the liquidity over the next four years. |
| Trustee Act | The Trustee Act states the need for “diversification of the investments of the trust”, including cash yet £4bn of charity funds is till only held with four banks |
The traditional, convoluted process of pursuing the competitive returns on cash can be extremely tedious and time-consuming. It requires constant monitoring, with products being launched and withdrawn every day and, as a result, the motivation to seek out higher returns on deposits has been absent.
But there has been some positive change, and further technological and regulatory developments could see a further shift in the mindset of individuals and advisers on the merits of active cash management.
There are many reasons why. New regulatory changes such as the introduction of phase 2 of Open Banking and the Payment Service Directive version 2 (PSD2) have made a big difference, allowing increased access and transparency for clients, advisers and cash management companies.
Technological advances have made it possible for cash management services to integrate with the banking system to provide clients with a much more efficient proposition. For advisers, this is a convenient and cost-effective way to maintain visibility of the client’s complete asset portfolio and improve advice.
Drivers behind active cash management
Aiding this continual improvement in banking transparency and autonomy is the introduction of cash management platforms. These services could help advisers by providing a view of their clients’ complete asset portfolios, so they can offer advice on which asset classes may be more suitable for them.
Harnessing the latest technological and regulatory developments in the sector, these platforms can be mutually beneficial for the client and adviser. They can help the client earn more competitive interest rates, increase their Financial Services Compensation Scheme (FSCS) protection through bank diversification, and create a more complete liquidity profile, and all while saving the adviser time and effort.
However, if you are considering using a cash management platform, it is important to ensure that the clients liquidity requirements are met and take into consideration the following elements:
- All monies should be stored in savings and deposit accounts with a UK banking license and covered by the FSCS deposit protection scheme
- The deposit must remain in the client’s name at all times
- There should be no government or corporate bonds
- No tied products such as current accounts
- No peer-to-peer investing
How it works
Each cash management platform has its own nuances, but the basic principles are the same. The client should go through an initial deposit allocation process based on the personal or fiduciary parameters of security, liquidity and return. A cash management platform should enable clients to manage their cash balances on a real-time basis.
A managed account should keep up to date with any fluctuations in interest rates, banking terms and accounts, and move money when and where necessary and under instruction from the client or adviser. This is not a discretionary service. When a client wants to make a withdrawal, the cash manager will transfer funds back to their bank account.
Due to the FSCS protection eligibility policy, a client’s cash is secure up to £85,000 per bank license. Deposits that are larger than this should therefore be split across the different banking institutions.
It is also important to be aware that the FSCS temporary high balance allowance gives an individual up to £1m of protection for a six-month period. This should be maximised around major liquidity events such as the sale of a main residence, until the client finds an alternative.
With the right protection in place, the cash can be earning a better rate of interest for the duration of the liquidity event. Careful management of multiple bank accounts with a variety of terms will ensure a client has access to their cash when they need it, while still earning good rates of interest.
The recent increase in the BoE base rate has made a small impact on the interest rates to date. Further industry changes, for example the Term Funding Scheme coming to an end in February 2018, will help to drive th increases in rates from the banks. This, coupled with more challenger banks coming into the market and increased competition, will go a long way towards ensuring that the returns for clients’ cash will improve. This means there is even more incentive to take an active approach.
For businesses like adviser firms, new client assets and money (CASS) regulations approved by the FCA, state that client money can be held in 90-day notice accounts instead of just 30-day accounts, which helps towards managing that cash effectively and getting a better interest rate on behalf of clients, ensuring that fiduciary responsibilities are met.
Active cash management takes advantage of technological advances as well as industry tailwinds such as regulatory change and the growth of challenger banks. While these developments bring with them a host of potential day-to-day benefits for clients and advisers, the importance of active cash management, particularly during liquidity events cannot be ignored.
Having the right procedures and tools at their disposal during these key moments allows advisers to be best placed to offer their clients informed, comprehensive advice, as well as saving themselves and their clients valuable time while increasing their earning potential.
Giles Hutson is chief executive of Insignis Cash Solutions
