The cash conundrum
Back in February – in the days when the original Brexit date was imminent – we spent 4 weeks touring the country and saw 361 advisers and paraplanners across 12 of our Masterclasses.
With Brexit and market volatility in mind, we wanted to find out from our audiences of financial planners, whether they are providing specific advice on clients holding money in cash on a platform, and if so, what is the primary use for your clients holding cash; for example, smoothing out any market turbulence.
As would be expected, those that said ‘Yes’ (they did advise on holding cash) referenced that it was for future investment – intentionally staying out of the market – or for administration purposes and managing income payments, drawdown and fees. However, what was less predictable was that a whopping 88% of advisers said they did not advise on cash. In Q1 of 2019 £1bn of our assets under administration was held in the transaction cash account, yet our research seems to suggest that advisers aren’t recommending this course of action. So why are so many investors remaining in cash for these prolonged periods of time, especially if they are not being advised to.
This isn’t necessarily a new trend, we have seen investors choosing cash over the past 12-18 months and we recognise that for some there will be conscious choice to do so. Nevertheless, as part of our duty to the investors using our platform, we need to consider the possibility that some of this money could either be sitting in cash due to an oversight or possibly not be sat in the most financially appropriate cash solution.
All platforms tend to have a transactional cash account for each investor, intended for short term use to manage payments of fees and income; such accounts are not and were never intended to be investment options. We at James Hay do our part and proactively monitor the transactional cash accounts, looking for any large amounts held for long periods of time; we will then notify the adviser in case they wish to take action. However, for investors choosing cash for the mid to long term, there are other options.
Most fund groups offer cash funds, and platforms will have those available as part of their fund choices, however some platforms have gone a step further offering access to fixed term deposits as a cash solution. James Hay, for example, has four reputable banks on its cash panel, which allows investors to hold cash in deposit accounts boasting attractive interest rates and investment periods from as little as 3-months to as long as 5-years. For advisers advising on mid- to long-term cash holding, it’s certainly something to consider and may be a more appropriate solution than leaving cash in the transactional cash account.
One thing that advisers should discuss with clients who are currently holding cash for the short term is, what do they consider ‘short term’ to be? With prolonged Brexit uncertainty bringing continued market volatility, the short term could quickly become the long term.
This research originally featured on FTadviser