Giles Hutson: Is your clients’ cash working hard enough?
by Insignis Cash Solutions in Industry Perspective
The potential rewards from generating improved returns on clients’ cash are huge, says Giles Hutson, but while competition in this part of the market may be improving, the psychology surrounding cash still needs to change
Stockmarkets are riding high and, while the timing of any correction is hotly debated, most commentators believe investors should be prepared. At the same time in the current cycle, UK government bond yields remain at, or close to, all-time lows.
This dislocation between the equity and fixed income markets means many advisers are recommending clients take some ‘chips off the table’ and increase the percentage of their investment portfolio held in cash. I was recently presented with a balanced portfolio with a suggested cash allocation of 8% while, for a defensive portfolio, it can be as high as 20%. These percentages continue to creep up as the valuations of other asset classes increase. But this is only half the story. In many cases, advisers only get to see part of the overall picture. Clients often treat their cash separately from their investments which, day-to-day spending aside, does not help anyone. How can an adviser give proper objective advice without seeing the full picture of a client’s finances? In most cases, clients sit on this cash in a high street bank account – probably one they have held for many years – earning little or no interest. When these paradigms are combined, a client could have as much as half their savings in cash and it is highly likely this cash is underperforming. Clients must be encouraged to share the full picture of their finances with their adviser but, for this to happen, the financial services sector needs to get much better at offering cash investment alternatives. Very few advisers offer cash investment products and, if they do, they are often structured notes. The principal may be protected but any return is actually exposed to the risk of interest rate or currency fluctuations. Suitability is often also an issue – these investments require a level of sophistication that is inappropriate for the majority of investors. For a lack of better options, cash and short-dated bonds are often confused. Not only do they behave in very different ways but, right now, the two-year UK Government bond yields less than half a percent while the best two-year bank account yields 2%. The bond is more liquid but the client can earn nearly four or five times the return with the bank. In addition, if the amount of cash with any one bank is £85,000 or less, then the bank deposit is Financial Services Compensation Scheme-eligible so the risk profile would be very similar to gilts.