We often get questions on the best way to manage cash in an account at TD for any clients who want to keep a significant amount set aside, outside our models. Read on to see our thoughts on how a conversation with your client and the decision may look.
The biggest issue at hand is that everyone uses “cash” in different ways and for different reasons. Below is our thought process to follow, with a suggestion for each case.
If the investor is uncertain as to when he or she is going to need the money, they have to choose the least of three evils:
- Keep the money in the custodial sweep vehicle, which does not pay a competitive yield. This is typical of cash on a custodial platform, as it is a significant source of revenue on their advisory business. For this reason, custodians rarely, if ever, make money market funds or stable value funds from other investment companies available on their platforms.
- Invest in an ultra-short-term fixed income fund. Yields can be attractive, currently in the 2-3% range, but the investor has to be willing to accept the risk of losses from time to time. Depending upon the product, some of these funds have lost 0.5% or more in a month, which may be too much to swallow for the most conservative part of a client’s portfolio, or for cash that is earmarked for a particular purpose.
- They can move the money out of TD and into a money market fund at another financial institution. These funds offer competitive yields currently at ~2% or more, and a stable market value, but the advisor “loses” control over the assets for operational, reporting, and billing purposes.
If the investor is certain over the timing of when they will need the cash, we encourage you to work with TD’s fixed income desk to see what low-risk options may be available.
For example, at the time of this writing, a 6-month FDIC-insured brokered CD is offering 2.45% annualized. A 12-month CD offers 2.7%. Principal return is guaranteed at the end of the term.
The 6-month T-bill is comparable in yield, but the 12-month is not as competitive with the CD of equal length right now, so we would go with the CD.
These relationships change over time, so what is appropriate today (CD over Treasury) may not be true next week. Therefore, this is more of a “playbook” than a recommendation, and therefore each situation might warrant a different solution.
Other considerations include whether you, the advisor, should charge on these assets. If the decision to hold cash is a strategic recommendation of the advisor based upon their understanding of the client’s impending needs and/or risk tolerance, there’s a case that this should be included in the overall management / advisement of the client's financial life.
As always, if you have any questions please reach out to firstname.lastname@example.org or give us call at (360) 301-7579.