Pillowcase cash and side investments: How to unearth clients' held-away assets

Chris Keller of Fifth Third Bank's National Private Bank knew he had earned a lot of trust when a client told him about a poorly performing side investment that his wife was still in the dark about.

"It was, you know, 'You can never tell her,'" said Keller, managing director of the private bank. "But, honestly, when you get to that point, you've got a great relationship with the client."

Like many wealth managers, Keller feels he and his colleagues can do their jobs best when they are aware of assets clients have stowed elsewhere. Even when clients have no reason to be embarrassed about their uses of their money, most aren't going to "show you all their cards at the beginning," Keller said.

"You've got to earn the ability for them to share their story with you," Keller said. "It's absolutely a process. And I think the firms that are best at it ultimately are the ones that become the primary advisor for the client."

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How firms go about learning of clients' assets held away

When wealth management executives talk about assets they'd like their clients to move over to them from other institutions, they are apt to cite numbers stretching into the trillions. But industry-wide estimates for how much clients have stowed elsewhere don't really exist — in large part because what one firm considers a held-away asset is often an in-house asset to a rival.

That doesn't mean that firms aren't constantly trying to account for their clients' outside holdings. 

In a poll of 175 financial advisors in May, Financial Planning's Financial Advisor Confidence Outlook (FACO) survey found 43% of the respondents place a high priority on learning about clients' held-away assets. Roughly the same percentage said held-away assets are something they want to know about but not a high priority, while only 10% said they weren't trying to learn about them at all.

Responding to a separate question, 32% said they are definitely able to account for assets held at other firms when bringing in new clients and nearly 60% said they probably could. Only 7% said they most likely couldn't.

So how do individual firms, whose clients have no strict obligation to reveal what they're doing with their "held-away" assets, arrive at their estimates? 

Beyond tried-and-true methods used to build trust with clients, technology is playing an ever-increasing role. At a basic level, Keller said, technical advances have greatly eased the task of gathering and turning in account reports and similar documents.

"Ten years ago, they had to pull them all together, and then we'd meet and they'd deliver them in a big envelope," he said. "And you'd have to make copies and write down all that stuff."

Other systems meanwhile seek to provide insight into just how much clients have held away by mining data. The credit reporting agency Equifax, for instance, offers a WealthComplete Premier service that uses anonymized investing from "leading financial institutions" to help firms estimate how much they have of their clients' wallet share. Equifax's website for WealthComplete Premier boasts that the service provides a "complete picture of estimated liquid financial assets for nearly every U.S. household" and helped one firm identify $14 billion held away at competitors.

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Advisors underestimate held-away cash — by a lot

One underappreciated piece of the assets-held-away puzzle is cash, said Ben Cruikshank, president and chief commercial officer of the RIA-support firm Flourish. Cruikshank said he and his colleagues routinely ask the firms they work with how much cash they think their clients have tucked away elsewhere.

"And the most common answer you get from an advisor still to this day is 1% to 2%," he said.

Industry surveys suggest the real number is far higher. In its latest World Wealth Report, the global consulting firm Capgemini estimated that wealthy investors at the beginning of this year held roughly 24% of their total wealth in cash and cash equivalents. The results were based on a survey of 6,510 high net worth investors, defined as people with at least $1 million in investable assets.

Cruikshank said he thinks the discrepancy comes down to the fact that advisors' perceptions of held-away cash are based almost entirely on the part of their clients' finances they deal with most directly. That usually means cash held in brokerage accounts but not necessarily on deposit at outside banks.

"The advisor's mind immediately goes to how much cash is sitting in the portfolio, how much is at Schwab, how much is at Fidelity," Cruikshank said. "And that is in a typically default cash-sweep program, sometimes in a purchase-traded money market fund. It's cash that's there for liquidity and billing-model purposes."

Cruikshank said he thinks advisors do take the trouble to learn of clients' outside cash holdings when they begin a relationship but maybe aren't returning to make sure their numbers are up to date.

"How often is the advisor coming back and saying, 'Did you open any other bank accounts? What are you earning on that cash? What's the purpose? Did you sell that second home, and some cash went here? Did you get a windfall?'" he said. "It's kind of remarkable to us that financial planning is somewhat divorced from actual client cash flows."

Understanding why clients hide held-away cash

Give clients options on cash management

Cruikshank said advisors' businesses tend not to be set up in a way that gives them a strong incentive to track clients' bank balances. Many RIAs make money by charging fees set as a percentage of the assets they have under management — but not those held away. 

There's also a psychological consideration, Cruikshank said. Although clients are generally happy to entrust the bulk of their finances to their advisors, most want some direct control of their cash.

"They want to be able to touch it," Cruikshank said. "They don't want to have to ask somebody else for a transfer."

With its Flourish Cash offerings for RIAs and other firms, Flourish is seeking to give smaller players some of the advantages enjoyed by large wealth managers with banking affiliates. Cruikshank said RIAs that use the service can move their clients' cash into accounts offering strong rates of return, protection from the Federal Deposit Insurance Corporation and other benefits commonly associated with bank deposits. The firm's accounts now hold roughly $8.5 billion in cash for nearly 60,000 households working with about 1,200 advisory firms.

Advisors who sign up for Flourish Cash still have to convince clients that transferring their held-away cash is in their best interest. Many times that doesn't come from promoting the advantages of the service itself — Flourish Cash, for instance, often offers higher returns than regular bank savings accounts. More frequently, it's the result of clients seeing benefits to giving their advisors more of a glimpse of their total financial picture.

"People work with financial advisors because they want their financial life to be simple, not complex," Cruikshank said. "Often this might be the first time their advisor has come to them and says, 'We have better solutions for the cash that sits outside the portfolio.'"

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Hold the judgment on clients' side investments

Flourish Cash accounts are set up to "straddle a line" — giving advisors more insights but also allowing clients to maintain direct control of their cash. Some advisors find clients want to keep some assets set apart for purposes that wouldn't necessarily be approved as part of a prudent financial plan.

Mitch Hamer, the founder and lead advisor at Intersecting Wealth in Chicago, said the most common use for such held-away assets is for bets on risky investments like cryptocurrencies. He said he has one client who maintains what she calls a "pushke" — a Yiddish word for a small money container.

Hamer said the client may use the account to buy shares in companies she's heard people talk about or something else that "she doesn't want to call us and ask us to do, or doesn't want it to be on our ledger."

All he asks in such cases is that clients let him know what they're doing.

"Those are the types of examples when I think we're just really fortunate to be fully aligned with our clients," Hamer said. "We're open and honest on our end, and we encourage them to be open and honest. We don't bring shame to the table. Nothing is ever going to be communicated in a 'I told you so' fashion."

Keller at Fifth Third Bank agreed it's crucial to never be judgmental about what a client may have done with held-away assets. Rather than second-guess actions already taken, advisors should start by acknowledging that virtually no one's finances are in perfect order — including advisors themselves.

"So no judgment at all," Keller said. "Really, it's about giving that comfort to the client that we understand and then getting them to have that realization that we've got the expertise to help them get to wherever they need to be."