Cash  

Advisers back cash deposits despite rate tumble

Mr Gallacher said cash deposits provided an important emergency fund to cover unforeseen expenditure as well as to cover short-term additional expenditure, which remained a valid with low interest rates on savings.

But he added a further use of cash was to act as a defensive element of the client’s overall wealth, noting that advisers would need to consider the potential long-term inflationary erosion effect of negative real interest rates on the client’s overall position.

Paul Stocks, financial services director at Dobson and Hodge, said: “Rates have been low for a number of years now but I’m at pains to explain to clients that moving away from cash for this reason alone ignores the fact the capital is secure and that this is the main reason people typically hold cash.

“Our approach to encouraging cash savings and the way we quantify the amounts required hasn’t changed [due to the low rates] and we simply suggest clients grin and bear the low rates as we are typically holding cash for capital security and risk aversion reasons.”

Dave Penny, managing director at InvestSouthwest, agreed cash or deposit-based savings were "vitally important" in financial planning to provide an emergency cash reserve.

He added: "The driver for the low rates currently on offer is the perception that the bank base rate will remain low, predicated on an assumption of some rocky economics post-Brexit.

"What it means for us as advisers is that we need to be particularly diligent in ensuring clients do have emergency and spending money in cash – and not much more.

"With the best rates running at approximately 1 per cent below inflation then real-term losses are guaranteed. Only clients who are totally averse to any risk to capital and who are prepared to accept that inflationary risk should have excess funds on deposit."

Just two weeks ago wealth manager St James's Place rolled out a cash management service, which will actively manage clients' cash deposits by seeking the best interest rates, to its 4,000 advisers 

Octopus Investment reported its cash deposits had surged 15 per cent month-on-month in February while research from James Hay, out earlier this year, showed a large number of investors were invested in cash for prolonged periods of time.

imogen.tew@ft.com

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