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Alex Sebastian examines how to ensure the cash part of a client’s portfolio achieves the best possible returns

Cash has taken much of the financial sector limelight over the past 18 months as the world’s major central banks have rapidly hiked interest rates. It’s been a long time coming. Between the tail end of the 2007–8 global financial crisis and the end of 2021, the stock market went on a bull run for the ages, only meaningfully interrupted by the pandemic-induced slump in early 2020. Interest rates were held close to zero, reducing the appeal of cash as an asset class.

This changed when inflation began climbing in 2021 – reaching a high of 11% in the UK in 2022 – and monetary policymakers began scrambling to rein it in. Now, cash can deliver annual returns in the region of 5% if you look in the right places.

As returns on cash have ramped up, so has the Financial Conduct Authority’s (FCA’s) scrutiny of those holding or managing it for clients. Meeting obligations in this regard as part of the Consumer Duty (a standard introduced by the FCA in July 2023 that requires financial services firms to ensure good outcomes for consumers) is an ongoing challenge.

The FCA cash savings market review, published in July 2023, shows that consumers in the UK collectively hold around £1.5tn in savings accounts, but most aren’t making near 5% – the UK base rate when the report was published – on average.

The FCA report finds that the pace and scale at which firms pass higher interest rates to savers needs to improve. It says that easy access accounts, which hold 60% of balances across nine of the largest UK banks and building societies, show average interest rate rises from 0.07% to 1.25% between January 2022 and May 2023. These ‘Big 9’ firms have, on average, “passed through only 28% of the base rate rise compared to an average of 80% between 2004 and 2009. For fixed-term and notice accounts, the average interest rate has risen from 0.3% to 2.47% over the same period”, it says.

It’s a situation that has been enabled by a general inefficiency in the marketplace, with most people either unwilling or unable to regularly move their cash around to find a better rate. The report says only 23% of savers had switched their accounts in the preceding six months.

Moving money Clearly, there is an opportunity for financial advisers and wealth managers to add value to clients by guiding them into products offering the best rates available – especially as there doesn’t appear to be anything blocking customer mobility within the global cash savings marketplace.

For example, according to June 2023 data from S&P Global Market Intelligence and the European Central Bank, deposits held by banks across Europe fell by 3.9% in the preceding 12 months as customers chose to move their cash elsewhere. “Banks have been slow to pass on higher interest rates to depositors, which has prompted customers to shift money to higher-yielding term accounts and other products,” S&P states in its report.

Direct model providers ensure that client cash is not exposed to a third party Similarly, S&P Global Market Intelligence reported in February 2023 that US banks with the lowest interest-bearing deposit beta (the portion of a change in interest rates passed on to deposit rates) in Q4 2022 “reported deposit outflows in the period”. And seven of the top 20 banks listed in the report saw deposit outflows of over 5% during that time.

Of course, some countries offer consumers much higher savings and deposit account rates. Zimbabwean and Argentinian banks lead the way, offering deposit interest rates of up to 110% in December 2023 and 108.62% in February 2024 respectively. But instability and a lack of robust protections do much to curb their appeal to international savers.

It's important for clients to be made aware of how inflation can reduce the real value of cash savings, says the managing director of UK-based Strategic Wealth Partners, Amyr Rocha Lima CFP™ Chartered FCSI (Financial Planning) and CISI Board member.

Selecting a cash management option And there are other factors to consider when looking at options for clients’ cash allocation, says Amyr, such as terms or limitations that come with appealing rates. He says the balance between return and accessibility needs to be considered. “A key consideration is liquidity,” he says, adding that it’s important advisers assess how likely their client is to want to access their money, as “it's not uncommon for certain cash accounts to offer enticing interest rates but also limit access or levy penalties for early withdrawals”.

According to Amyr, other factors to look out for when choosing a cash management approach are security and whether accounts are manageable online, offer reasonable management fees and good customer service. These features can considerably improve a client's overall experience and satisfaction with their savings account.

Clients in vulnerable circumstances, those in later life, and those with attorney or deputy powers will typically overweight cash, so ensuring that they receive a good return is even more important.

Establishing suitability As part of the holistic six-step financial planning process, all CERTIFIED FINANCIAL PLANNER™ professionals will comprehensively assess a client's wider requirements and risk tolerance levels. Wealth managers also assess risk tolerance. This is important to consider for cash management decisions, even though the volatility involved is not at the level of equities and some other asset classes. Inflation, lock-up periods and counterparty risk can all affect the suitability of cash management options. The Consumer Duty requires evidence that conversations have occurred with clients about their needs and the associated risks.

Amyr says, “A good financial adviser will adopt an extensive process to ensure that their advice is appropriate.” This includes thoroughly documenting clients' financial objectives, risk tolerance and specific liquidity requirements. He explains that this detailed documentation will guide an adviser's recommendations and clearly record why a particular cash savings offer is suitable for the client's specific financial situation.

Dealing with changes to the marketplace The number of products available in the cash products space and the specifics of each one can change often. New banks enter the market with different offerings regularly, while M&A deals in the sector can happen at any time.

Chris Kenny, Chartered FCSI, chief investment management director at Evelyn Partners, says there is “great optionality for managing cash” in response to the current market. To optimise outcomes, he recommends mapping the various options against individual client preferences and circumstances. These include tax efficiency goals, counterparty risk considerations and time horizon.

Chris adds that with the next move in interest rates expected to be down rather than up, it is likely that fear of missing out on the best rates will increasingly feature as we move through 2024.

Financial planners and wealth managers will likely keep up with these market shifts. However, ensuring clients get a good deal on their cash on an ongoing basis could prove very time-consuming.

There are various open sources of information available should an adviser wish to take this on. The Bank of England website has official lists of banks and building societies published monthly. There are also tools, such as Moneyfacts (an online platform that provides whole-of-market data for the UK financial industry), which can be used in tandem with internal customer relationship management systems for ongoing monitoring.

Outsourcing cash management Outsourcing will often be a better option than handling the process in-house. The options fall into two camps: ‘direct’ or ‘trust’ providers. Most in the market are trust-based. These options offer self-serve platforms, with monies transferred to a hub account controlled by the provider, who then offers a restricted panel of cash products. Examples are Hargreaves Lansdown Active Savings, Raisin, Flagstone, Insignis and Akoni.

Chris explains that Evelyn Partners uses an in-house cash management service that enables clients to allocate their cash savings across hundreds of accounts from a panel of over 50 banks. This optimises interest rates and reduces risk across multiple institutions to maximise Financial Services Compensation Scheme protection limits.

Direct model providers offer a whole-of-market service independently to providers and open accounts in the client's name, taking care of the administrative burden of opening multiple bank accounts. Examples in this category include Cascade Cash Management and Deposit Sense.

Furthermore, direct models don’t handle clients’ money – it goes straight to the bank in the client’s own name – ensuring that their cash is not exposed to a third party and providing an additional level of security. These models also provide a faster rate of reclaim under the Financial Services Compensation Scheme (FSCS), with the FCA noting in a 2021 Dear CEO letter that “FSCS payments can take longer for deposits placed via a deposit aggregator under the trust model”.

Where to from here? In its Cash savings market review, the FCA proposes a mix of actions – some that are directly related to the Consumer Duty and some to improve competition in the market – to ensure “good outcomes for savings customers in terms of price, quality, range and service”.

These include tailoring the Consumer Duty outcomes for the cash savings market, launching a targeted customer engagement campaign with the UK’s largest banks to encourage customers to start saving and/or to review other product options, and developing a savings dashboard which gauges consumer activity in the savings market and measures progress towards a more competitive market.

While the report acknowledges that some progress is being made in this sphere, it also recognises that “much more is required to ensure savers consistently get a better deal”. All future attempts to ensure rates are fairly passed on to customers will need to be “much more ambitious and effective in using communications” to enable customers to meet their financial goals, it says.

Alex Sebastian is a freelance financial journalist specialising in business, investing and wealth management. He has over a decade of experience across national consumer media and investment industry titles.

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