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Active cash management – can low interest rates be beaten?

10 January 2018

In a low interest rate, high inflation environment, where investors, wary of a market correction, want to hold cash, adviser firms need to find ways to actively manage that asset, says  Giles Hutson, CEO of Insignis Cash Solutions.

With many market commentators speculating that a market downturn is on the cards, financial advisers are increasingly recommending that clients keep cash on the side-lines to deploy at the right time. But this cash should be managed actively to ensure clients get access to the best rates available, particularly in a high inflation environment.

UK individuals currently already hold over £700 billion of cash that isn’t being put to use – languishing in low interest accounts with uncompetitive rates. An improvement of just 1% on these rates would return £7 billion back to these people and result in a significant boost to the UK economy.

The traditional, convoluted process of pursuing competitive returns on cash makes it extremely tedious and time consuming. It requires constant monitoring, with products being launched and withdrawn every day. As a result, financial advisers often don’t have the time or motivation to seek out higher returns on their clients’ cash deposits; this inertia means clients are missing out on free money.

Diversification is a key tenet of good portfolio management and that should, especially in the current investment environment, include a cash allocation. Advisers have a duty to their clients to provide them with the best possible platform to earn decent returns on their cash. They must rethink their approach to cash by focusing on its return potential alongside its qualities as a safe haven.

If attitudes to cash can be turned around, it can accumulate meaningful returns that stack up favourably against other asset classes, especially bonds. However, the industry needs to get better at offering cash investment alternatives; very few advisers offer cash investment products and if they do, they’re often structured notes. The principal may be protected but any return is exposed to the risk of interest rate or currency fluctuations. Suitability is also an issue – these investments require a level of sophistication that’s inappropriate for the majority of investors.

For a lack of better options, short-dated bonds are often used as alternatives to cash. Not only do they behave in very different ways but right now, two year UK Government bonds currently yield 0.49% while the highest two year bank account yields 2%. Although bonds are more liquid, clients can earn around four times the return with a bank. Additionally, if the amount of cash with any one bank is £85,000 or less, then the bank deposit is FSCS eligible and so the risk profile is very similar to gilts.

Active cash management is important at any stage in the cycle but arguably even more critical in the current interest rate environment. The recent rate rise from the Bank of England is a helpful start but it hasn’t made a meaningful difference to savers as inflation continues to eat into clients’ hard earned cash savings. There are two factors which will have a greater impact on their returns; increased competition in the banking market and overcoming the inertia around cash management.

Progress is being made across the UK retail banking industry. New players are driving more competitive rates and initiatives such as Open Banking will be a catalyst for greater transparency, increasing clients’ awareness about the need to attain better rates on their cash deposits. However, although regulatory change, the growth of challenger banks and developments in technology are improving competition, the psychology surrounding cash still needs to change.

A number of platforms have emerged in recent years which mean shopping around for the best rates no longer needs to be a headache. Advisers can use platforms to access multiple banks for their clients; they should make 2018 the year they take action to generate better returns on their clients’ cash.

Insignis runs a CPD-accredited cash management course to help financial advisers and paraplanners understand the importance of cash management as a complement to their clients’ asset portfolio. Details can be found here.

Professional Paraplanner