Five years ago, Ben Cruikshank, now president of Flourish, a fintech platform for RIAs and a subsidiary of MassMutual, stumbled upon a shocking revelation. Multiple market research studies found that high-net-worth individuals self-reported that they keep about 20% of their wealth in cash. Yet when their advisors were confronted with this information, they said it couldn’t be true. The advisors suspected the actual number was closer to 1-2% in cash, set aside for fees and other small expenses.
Addressing clients’ hideaway cash can offer RIAs opportunities to increase AUM while gaining a more accurate overall view of clients’ assets and allowing advisors to more effectively manage risk-return profiles.
Cruikshank did some digging and found that this discrepancy between the cash that clients had and what advisors thought they had to be even more pronounced among RIAs, as they were typically not part of a larger organization that might provide a more holistic view of clients’ balances in other accounts. The ability to expose this hideaway cash to support RIAs in getting a more complete picture of their clients’ wealth would lead to the creation of Flourish, a platform that has seen its assets under custody double since the start of the pandemic.
An opportunity for RIAs
The reasons for this mysterious hideaway cash can be attributed to a number of things, including the convenience of not having to go through an advisor to make a big purchase. But the recognition that these funds exist, and exist to a degree exponentially larger than advisors imagined, is the key finding here. Addressing this hideaway cash is arguably the greatest opportunity for RIAs to meet some of their most prominent objectives: strengthening their relationships to enhance their clients’ experience, and generating growth as they bring significant sums into their AUM.
In Mercer’s Global Wealth Management Investment Survey from the first quarter of 2022, which surveyed wealth managers in 26 countries, 78% of respondents surveyed cited improvement of the client experience as their main business priority for the next two years — a focus aligned to increasing AUM of existing clients, which was the top driver of growth over the past five years.
A cash management platform such as Flourish can help achieve those goals by offering a savings rate of 3% — a far better option than the microscopic interest offered by the big four banks, where most hideaway cash is stored.
Investors once more look to cash
During the long bull market, naturally, many investors reaped excellent returns through highly conventional allocation strategies. “Against a backdrop of ever falling interest rates, most asset classes delivered impressive returns over the past 10 years. In fact, it’s among the best decades ever for the traditional 60/40 equity-bond portfolio, which means many wealth managers have been able to sit back and enjoy the ride,” wrote Hooman Kaveh, Mercer’s Global Chief Investment Officer, in the report detailing the survey findings.
However, the years of reaping strong rewards through passive management are over, says Cruikshank, who calls today’s market “scary for advisors in a way that it has not been for a long time,” noting that “equities have been hammered,” and “fixed-income portfolios are getting crushed.” Given these market conditions, Cruikshank believes holding cash could be a more attractive option than at any other time in the past 15 years.
Not surprisingly, 57% of respondents in Mercer’s survey say inflation is the leading investment challenge over the next two years. Many wealth managers also expect investment returns to be lower in the next two years, and subsequently, 76% of respondents in the Americas see diversifying away from traditional asset classes as a top opportunity. Further, 88% of respondents expect the Fed to continue to raise interest rates by as much as 2%, and an additional 6% of participants expect an increase of more than 2%.
That scenario makes high-yield savings accounts an attractive option, and one already catching on. Investors report little movement out of cash — 53% of those surveyed intend to keep the existing level of cash in their portfolios unchanged, and 20% will increase their cash exposure over the next 12 months.
Benjamin Lev is a freelancer at RIA Intel and based in New York City.
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