A favorite trick of wealthy investors seeking to protect their cash gained steam when the Federal Reserve began hiking interest rates almost one year ago to the day. Now, amid startling bank implosions and jitters over market contagion, the method is gaining traction with financial advisors and affluent clients.
What's known as cash management services is a workaround to federal regulations that insure bank customers with checking accounts, savings accounts, certificates of deposit and money market funds only up to $250,000, per depositor, account category and bank. So a married couple in which the husband has a savings account and the pair co-own a joint account is covered separately for both accounts. Nearly 94% of more than $151 billion in deposits at the collapsed Silicon Valley Bank, held by technology companies, investment funds and high net worth individuals, were uninsured at the end of last year, S&P Global Market Intelligence
The workaround is garnering fresh interest after regulators took the
Silvergate, based in La Jolla, California, said it would refund depositors. But for the other two banks, investors shouldn't count on the highly unusual federal relief happening again, advisors and lawyers say.
Supersizing FDIC protection
Cash management is a behind-the-scenes function in the wealth management industry, whose front face is portfolio management and retirement planning. Through relationships with companies that specialize in the services, larger registered investment advisory firms funnel hundreds of millions of client dollars to thousands of FDIC-insured banks for safekeeping.
The outsourcing means a client gets Federal Deposit Insurance Corporation protection on each $250,000 parceled out, along with a higher interest rate than what's typically on offer for a checking or savings account at a commercial bank. Wall Street wirehouses with multiple bank entities — Morgan Stanley has two — offer an in-house version of the move.
Investors like the workaround because it offers far higher interest rates — some topping 4.5% — than a traditional savings account. While many certificates of deposit (CDs) pay around that rate, they're covered only to $250,000.
In the wake of the bank implosions, Frank Bonanno, a managing director and head of marketing at StoneCastle Cash Management in New York, said that "hundreds" of new business clients wanting FDIC protection for their money have called in recent days, "just in case banks in the ripple zone get affected." StoneCastle has parceled out more than $21 billion to 900 banks, about 15% of that money on behalf of roughly 450 RIAs, Bonanno said. The company takes individual investor deposits up to $100 million and pays 4.16% interest.
Cash is still king
When banks crater, cash has a particularly special caché: "Clients prioritize the protection of principal," said Kevin Bannerton, the executive vice president and head of wealth management at Rich and Tang Deposit Solutions, a liquidity provider that works with banks, in Hackensack, New Jersey.
Global advisory clients with at least $1 million in investable assets kept 24% of their portfolio in cash or cash equivalents at the beginning of last year, according
Bank stocks
"We just moved a little bit of money around between some of the banks in our network just to avoid some of the names that had headline risk, so to speak," said Bruce Bent II, the CEO and president of Landing Rock, a cash management provider in New York that pays 4.58% on an individual client's first $10 million.
With the exception of MaxMyInterest, cash management companies are typically open only to businesses, not directly to individual investors.
Ben Cruikshank, the president of Flourish, a unit of insurer MassMutual that caters to independent advisors, said that "the phones have been ringing off the hooks in the last few days" with calls from existing advisors and new firms coming into the fold. Some callers had reason for concern: Flourish used the collapsed Signature Bank to park clients' cash. Cruikshank said that when the bank went into receivership last Sunday, Flourish immediately moved investors' money it had sent there to other banks. "That all happened behind the scenes — clients don't lift a finger," he said.
The deposit swap tango
What's known as the deposit-swapping network is beneficial to all parties. Investors get a federal guarantee they can recoup large sums should a lender fail. Banks strengthen their balance sheets through the
IntraFi, a cash services company in Arlington, Virginia, is the largest of the "deposit swappers," and also provides up to $150 million in FDIC-insured certificates of deposit at third-party banks for single depositors. Like its competitors, it funnels money in $250,000 chunks to its 3,000 partner banks in the U.S. The company said Tuesday that no one was available for comment.
Some cash management firms are so-called deposit brokers, and thus broker-dealers. They aren't fiduciaries, so any bank to which they farm out cash can then parcel out those dollars to another bank.
For investors, that process can be risky, said Gary Zimmerman, the founder and CEO of MaxMyInterest, a cash management company in New York.
"It's a black box," he said. "If they sell your deposits to another bank or you already have an account, then you might overlap" and lose FDIC coverage." (Zimmerman is married to Chana Schoenberger, the editor-in-chief of American Banker, a sister publication of Financial Planning.)
More than half of affluent investors, or 58%, want to consolidate all of their investable assets in one place, according to a Cerulli Associates
Asked if collapse jitters were subsiding, Bent replied, "It's hard to tell" if "the storm is over." He compared the receiverships of Silicon Valley Bank and Signature Bank to "tornadoes all of a sudden appearing on the horizon and then wreaking havoc."
Said Zimmerman: "I think that the events of the last few days have highlighted the importance to both advisors and their clients of making sure that all of their funds are not only fully insured, but liquid."
