When the Federal Reserve started raising rates almost a year ago until today, a favorite trick of wealthy investors to protect their cash gained momentum. Now, amid fears over alarming bank implosion and market contagion, the method is gaining momentum among financial advisors and wealthy clients.
What are known as cash management services are federally regulated to insure bank customers up to $250,000 in checking accounts, savings accounts, certificates of deposit, and money market funds by depositor, account category, and bank. is a workaround to So a married couple where the husband has a savings account and the pair shares a joint account will have both accounts covered separately. Nearly 94% of the more than $151 billion in deposits in failed Silicon Valley banks held by tech companies, investment funds and high net worth individuals were uninsured, according to S&P Global Market Intelligence. Said Tuesday.
Workarounds are gaining renewed interest after regulators withdraw restrictions. extraordinary step Last Sunday, it said it would complete all depositors of its $209 billion institution, Silicon Valley Bank, and its $110 billion New York signatory bank. The former was aimed at high net worth technology investors and companies, many of whom had deposits well over $250,000.crypto friendly Silvergate Bank closed March after the collapse of the virtual currency exchange FTX.
La Jolla, Calif.-based Silvergate said it would refund depositors. But for two other banks, he said, investors shouldn’t expect another highly unusual federal bailout, advisers and lawyers say.
Supersizing FDIC protection
In the wealth management industry, cash management is a behind-the-scenes function, the front of which is portfolio management and retirement planning. Through relationships with firms that specialize in this service, a large registered investment advisor pours hundreds of millions of customer dollars into his FDIC-insured thousands of banks for custody. .
Outsourcing means that the client is insured by the Federal Deposit Insurance Corporation for every $250,000 parceled, with interest rates higher than those normally offered for commercial bank checking or savings accounts. increase. Wall Street telecom firms with multiple banking organizations (Morgan Stanley has two of them) offer an in-house version of the move.
Investors love this workaround because it offers much higher interest rates than traditional savings accounts (some are over 4.5%). Many Certificates of Deposits (CDs) pay that rate, but only cover up to $250,000.
Following the bank collapse, Frank Bonanno, managing director and chief marketing officer of Stonecastle Cash Management in New York, said he had recently received calls from “hundreds” of new business clients seeking FDIC protection. . If a bank in the ripple zone is affected. Bonanno said StoneCastle has distributed more than $21 billion of his money to his 900 banks, with about 15% of that amount being distributed on behalf of about 450 of his RIAs. The company accepts deposits of up to $100 million from retail investors and pays 4.16% interest.
Cash is still king
Cash has a particularly special cache when banks become cratered. “Customers prioritize the protection of their principal,” said Kevin Bannerton, executive vice president and head of management at Rich and Tan Deposit Solutions, a liquidity provider that works with Hackensack banks. says. , New Jersey.
A global advisory client with at least $1 million in investable assets held 24% of its portfolio in cash or cash equivalents at the beginning of last year. To the latest World Wealth Report By Capgemini, a consulting and technology company.individual investors Over $1.8 trillion in US money market fundsA type of cash-like mutual fund, as of March 8, according to the Investment Company Institute.
bank stocks back on tuesday After being smashed the day before. Still, just in case, a cash management firm for wealth managers diversifies potential risks while assuring advisory firms of the safety of their assets.
Landing Rock CEO and President Bruce Bent II said, “To avoid some of the names at risk of headlines, so to speak, there is a small amount of money between several banks in the network. We just moved the money,” he said. A management provider in New York, he pays 4.58% on his first $10 million for individual clients.
With the exception of MaxMyInterest, cash management companies are usually only open to businesses, not directly to individual investors.
“The last few days my phone has been ringing,” said Ben Cruikshank, CEO of Flourish, a division of MassMutual that provides services to independent advisors, with calls coming in from existing advisors and new firms. I was. Some callers had reason for concern. Flourish used the collapsed Signature Bank to hold customers’ cash. Cruikshank said Flourish quickly moved investors’ money to other banks when the bank became trustee last Sunday. “It all happened behind the scenes. The client never lifts a finger,” he said.
deposit swap tango
What is known as a deposit exchange network is beneficial to all parties. Investors get a federal guarantee that they can recover large sums of money if the lender fails. Banks strengthen their balance sheets through: deposit inflowAdvisors handle the chaotic financial lives of their clients under their own roof. According to Bloomberg, investors don’t have to do what Milwaukee Bucks basketball star Giannis Antetokounmpo once did. Open 50 different bank accounts Track the paper tsunami.
IntraFi, an Arlington, Va., cash services company, is the largest “deposit exchanger,” offering up to $150 million in FDIC-guaranteed third-party bank certificates of deposit for single depositors. It offers. Like its competitors, the company has poured $250,000 of his funds into his 3,000 partner banks across the United States.
Some cash management companies are so-called deposit brokers, or broker-dealers. Because they are not trustees, the bank to which they lend cash can distribute the dollar to another bank.
For investors, the process can be risky, said Gary Zimmerman, founder and CEO of New York cash management firm MaxMyInterest.
“It’s a black box,” he said. “If they sell your deposit to another bank or you already have an account, you could be duplicated” and lose FDIC cover. )
According to Cerulli Associates, more than half (58%) of wealthy investors want to consolidate all their investable assets in one place. investigation June last year. But he reports that just over one in three of his investors in banks, telecoms and independent companies use the same firm for both their investment and money management services. In an independent advisory firm, he has both functions under one roof, and his clients are less than a quarter he has. Deposit swaps are mostly used by large advisory firms, Bonanno said, but mid- and small-sized RIAs see great opportunities, Ceruri said.
Asked if collapse fears had subsided, Bent replied that it was “difficult to tell” if the “storm was over”. It was likened to a tornado that suddenly appeared and caused havoc.
Mr Zimmerman said: “I think the events of the last few days highlight the importance for both advisors and their clients to ensure that all funds are not only fully insured, but liquid. .”