When Cash Is King, Financial Advisors Rule

One upside of the Federal Reserve's monetary policy is investors are being paid well to sit tight. 

Perhaps the biggest upside to the Federal Reserve’s aggressive efforts to tamp down inflation, aside from actually tamping down inflation, is the mushrooming opportunities to earn respectable yields on cash for the first time in years.  

For financial advisors, presenting clients with the notion of virtually risk-free yields in the 5% range represents one of those rare opportunities when it feels like everybody wins.   

“Cash is no longer trash" is how Vance Barse, founder of Your Dedicated Fiduciary, put it.   

With economists and market watchers wringing their hands over the prospect of a looming recession and lofty stock market valuations, financial advisors like Barse are suddenly comfortable letting clients sit on the sidelines in a “sleep-at-night strategy.”  

Higher Yields Than Cash

And because there are still banks shamelessly paying out a couple basis points for their savings accounts, advisors can flex their value-added muscles by helping clients allocate to higher-yielding cash alternatives.  

“It has been 10 or 15 years since I’ve had clients reach out at this level and ask about ways to deploy cash,” Barse said. “Clients have a newfound interest in something I call T-bill and chill.”  

The stubbornly inverted yield curve that has shorter-term bonds paying higher yields than longer-term bonds is among the cash management blessings of the current economic environment.  

Max Wasserman, founder and senior portfolio manager at Miramar Capital, said investors are gaining almost a full percentage point worth of yield by buying one-year Treasurys instead of five-year Treasurys. “If you can get 5% on your cash, a lot of people are asking why they should risk their money in the stock market,” he said. 

More Dollars in Money-Market Funds  

Even though the S&P 500 is up 14% from the start of the year, Wasserman pointed out that it is still negative on a year-over-year basis and losing appeal among conservative investors or those with shorter time horizons.  

That point is illustrated by the record $6 trillion sitting in money-market funds, including $900 billion worth of inflows this year.  

Sumit Roy, senior ETF analyst at etf.com, said about $29 billion has moved into cash proxy ultra-short-term bond ETFs this year. The biggest winner so far has been the iShares 0-3 Month Treasury Bond ETF (SGOV), which has seen net inflows of $7.6 billion this year.  

“These numbers suggest that many investors are using ETFs for access to super-safe, cash-like investments,” Roy said.  

Mike Dickson, head of research at Horizon Investments, is among those advisors allocating client cash to exchange-traded funds because the “fees are much lower than money-market funds and with higher payouts due to current Fed policy.”  

“The yield curve is completely inverted and given the recent Fed projections, short-term rates aren’t going down anytime soon, especially without notice,” Dickson said. “Given this backdrop the low-cost liquidity and high yields that T-bill ETFs provide are the obvious choice for cash management compared to money-market funds, CDs or savings accounts.”  

Low Risks With High Yields

Brian Frank, chief investment officer at Frank Capital Partners, describes the current cash-management environment as “a vastly different world from three years ago” before the Fed started hiking rates.  

“I have nothing but good news for clients when it comes to allocating cash,” he said. “We used to worry about duration risk, but now we’re advising clients to keep their cash in money markets and just earn that 5%.”  

As a value investor, Frank said his inclination at this point in the cycle is to avoid market beta as much as possible, which is another case for high-yielding cash strategies.  

“The dividend yield on the S&P 500 is 1.45%, and you can get 4.4% from a 10-year government bond,” he said. “I am absolutely encouraging clients to make 5% on their cash, because it’s hard to find valuations in this market that stand up against a 5% risk-free rate.”