What’s Better for Clients Than Money Markets? Max.

This week, Max is at the T3 conference in Orange County, Ca., which is spurring us to think about financial advisors and how we can help them best serve their clients.

As financial advisors think about where to put their clients’ cash, many head automatically toward money market funds. But in today’s regulatory environment, where money market funds pay ultra-low rates and can force investors to pay redemption penalties in times of market turmoil, they may no longer be the best choice.

There is a better solution for cash held in brokerage or bank accounts. It’s called Max.  

Some statistics about cash: high-net-worth households in the U.S. are currently holding 23.7% of their assets in cash. That works out to a staggering $3.5 trillion, just among the top 4% of the U.S. population.

Most of this cash is being kept in the wrong place. In money market funds, it is under-earning its potential and it’s not insured.

Clients hold cash for a host of reasons, including as a reserve for a future real estate purchase, private equity capital call, or other asset buy. A recent U.S. Trust survey showed that a majority of clients were holding cash on the sidelines to serve as “dry powder” to capitalize on market opportunities. That’s the same reason why Warren Buffett has said he likes cash so much.

Most financial advisors think that clients aren’t holding much cash because what they see is the cash allocation within the client’s investment portfolio. The reality is that there’s a lot more cash sitting on the sidelines, out of view of the advisor. Most high net worth investors maintain multiple advisory relationships at several institutions. Advisors’ wallet share is only what clients choose to bring to them.

Where is this cash being held? Up until this point, the default for many financial advisors was to keep client cash in a money market fund. This is no longer best practice, especially in a fiduciary environment. It’s difficult to justify offering your clients less of a yield on uninsured cash when there’s a solution that allows them to earn more and stay FDIC-insured.

After the 2008 financial crisis, the SEC imposed new rules on money market funds, rendering them no longer a true cash equivalent. Under the new regulations, retail-held prime funds are subject to redemption gates of up to 10 days and redemption penalties of 1-2% in periods of financial stress. This means that your clients may not be able to access their funds when they need them most. At the same time, yields on money markets are still relatively low, and these funds are not insured.

How can Max solve these problems? Max offers a tool that lets advisors bring more cash into view, help clients earn more on that cash, and help ensure that cash is fully insured. We’ve created a better solution for cash, offering liquidity, higher yield, and greater FDIC insurance. Max doesn’t take custody of clients’ funds. Their cash stays in the client’s own name, while our software acts as a sort of air traffic control system, telling the banks to move funds among the client’s own accounts whenever it’s advantageous to do so to get better rates. In this manner, clients continuously earn the highest yield possible within the FDIC limits. That means Max members can keep up to $5 million per couple insured, and we have a partner solution that can deliver up to $50 million of FDIC coverage per tax ID for business accounts or complex trusts.

Now that money markets are considerably less attractive, isn’t it time to find a better way to manage cash? Learn more about Max at MaxForAdvisors.com.

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Fiduciary Solutions for Financial Advisors: How to Think About Clients’ Cash

Max members are earning about 10 times more on their cash than the national average.

Max members are earning about 10 times more on their cash than the national average.

With the move towards the fiduciary standard across the investment-management landscape, financial advisors increasingly are looking at how they can make sure their clients are getting this standard of advice for the cash portion of their portfolios as well as for their securities. That’s where Max comes in. 

Cash is the one asset class that’s present in every portfolio. But a near-zero-interest-rate environment over the last few years has meant that investors overwhelmingly are earning almost nothing on cash. The national average on savings accounts is 11 basis points — 0.11%. As a fiduciary, an advisor is bound to give advice that’s in a client’s best interest financially. For cash, this means advisors have to seek out ways that clients can earn more interest while remaining insured under the FDIC deposit guarantees.

– Think carefully before using money market funds

Money market funds are a traditional substitute for cash, because they’re designed always to trade at a stable $1 per share. But with new regulations, these funds may now be able to hold onto investors’ money if markets are in turmoil. That means that clients may not be able to get their money out of a money market fund when they need it most. With this lower level of safety, and essentially no yield, money market funds may not be up to the fiduciary standard as a cash equivalent.  

– Use online banks

Online banks don’t have branches, so their cost structure is considerably less than their brick-and-mortar competitors. This imbalance allows them to offer higher interest rates to depositors — above 1%, in some cases, making online banks the highest-yielding places to park cash that clients wish to keep fully liquid. FDIC-insured online banks have the same federal deposit guarantee as any other U.S. bank protected under the program.

– Seek more FDIC coverage

Many investors don’t realize that exceeding the FDIC limits in their accounts means that excess money may not be safe if something happens to the bank. If your clients hold more cash than the FDIC limit — $250,000 per depositor, per account type, per institution — you should consider helping them open accounts at additional banks to gain FDIC coverage for as much of their cash as possible. Keeping cash safe is a prerequisite for fiduciaries.

– How Max can help

It’s possible to get both higher interest on cash and greater FDIC coverage. That’s what Max provides for advisors and their clients through the Max Advisor Dashboard. The average Max client is currently earning more than 1.00% on cash and enjoying FDIC coverage across several institutions. Learn more about how you and your clients can benefit at MaxForAdvisors.com.

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