Alistair Hewit, head of cash management at Deutsche Bank Private Wealth Management UK, explains the benefits of cash as an asset class.
It has often been said that ‘cash is king’, yet cash can be overlooked or disregarded as an asset class in its own right.
A recent survey suggested eight out of ten advisers spent less than 10% of their time managing the cash element of a portfolio, and one in ten spent no time on it at all.
Advisers with high net worth clients should not ignore liquidity requirements. Many investors have become much more risk averse since 2008 and traditionally safe options beyond cash have become much less attractive (the Swiss National Bank issued a note recently that had a negative interest rate, which demonstrates how for many, return of capital as opposed to return on capital – at almost any price – has become the priority.)
The ability to manage liquidity well is becoming increasingly important for advisers and wealth managers against the pressures of tax, inflation and low interest rates that can be challenging.
If the market forecast is correct, the UK base rate could fall from its current 0.5% level by the end of 2012. This would lead to unappetisingly low deposit rates in general, particularly if cash is left simply sitting in a current account.
The average of the top 10 retail savings account rates is over 3%, so even at the most basic level, just helping clients find the right product with a comfortable balance of yield and access is valuable.
For individuals with cash in six-figure territory, small changes in cash interest rates and dividend yields can add up significantly.
It is important, to be mindful of counterparty credit risk concentration. Preservation and liquidity are crucial. The Financial Services Compensation Scheme (FSCS) in the UK offers protection against the default of a UK deposit-taker up to £85,000 per depositor.
Not widely known is that this level of deposit protection only applies at the ‘authorised institution’ level.
The FSA website shows from its published lists that many of the recognisable banking brands and building societies are actually part of the same FSA authorised institution.
If you have spread your client deposits up to the compensation level with multiple brands of the same institution, they would only be eligible for cover up to £85,000 on all deposits.
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