The events of the last few years have tested us all. No sooner was the pandemic retreating off the front pages when it was all too quickly replaced by war in Ukraine. At home, a succession of Prime Ministers came and went, leaving financial markets in turmoil and a constant state of flux even now.
For investors and advisers alike, this resulted in a bewildering array of soaring prices, disappearing financial products and rising interest rates. And as mortgages rose and share prices tumbled, savers were left unsure whether to stick or twist.
But against this backdrop, cash has come into its own.
While other investments can rise and fall, cash is largely untouched by world events, representing a safe house and a handy pot to dip in and out of when needed. However, there is still an inertia around cash, with huge deposits left to idle away in high street accounts offering little in the way of interest or rewarding loyalty.
The plus side to rising interest rates is that investors now have the opportunity to maximise their interest income in a manner unmatched in decades. As a result, advisers are placing cash deposits firmly on their agendas, starting conversations with clients, and recognising cash as an integral part of a broader savings portfolio.
To find out the current state of play around cash savings, products, and cash deposit platforms, we teamed up with Professional Adviser explore the challenges of holding cash for both advisers and their clients. We asked more than 250 Financial Advisers and Wealth Managers for their opinion. The results were striking, clearly placing cash front and centre of any investment consultations.
We hope you find this report insightful.
The Cash
Conundrum
And how the role of cash in portfolios is changing
FOREWORD
Simon Merchant,
Co-founder and CEO of Flagstone.
What’s driving investors to hold more cash in 2023?
1.
The Cash Agenda
A cash strategy is not one-size fits all.
2.
3.
Advisers versus cash: Are you failing clients?
What matters most to clients.
The missed cash opportunity
Contents
This report sets out the findings of surveys conducted in Q1 2023 and looked at cash-related attitudes among a sample of over 250 advisers in the UK who subscribe to Investment Week and Professional Adviser. The research also comprised a series of in-depth interviews with a panel of independent financial advisers, whose views were added to the final research report as well.
Methodology
“
We could use terms like safe money, emergency fund money, and more importantly, money that clients don’t want to take risks with.
— Independent financial adviser
It’s money that people know they
can rely on.
Cash Is Back on the Agenda
part one
Over a decade of low interest rates until late 2021 has meant cash has not been a key ingredient in growing and preserving wealth by many financial advisors.
But in 2023, the case for cash as a strategic asset is growing. This is not only as a response to rising interest rates - to date they have risen from 0.01% in December 2021 to 4.25% as of March 23 – but also due to the buffer it provides during times of market and economic volatility, of which clients have seen a lot recently.
In fact, our survey of over 250 financial advisers and wealth managers reveals that cash is very much back on the agenda, with 83% stating that cash is coming up in conversation with clients more now than two years ago.
2%
don’t know
83%
yes
15%
no
Does cash come up in conversations (with clients) more now than two years ago?
Cash advisers:
The flight toward cash among clients is largely driven by two factors. Cash is seen as a stable, safe-haven asset in uncertain times.
But interest rates are now also high enough that investors are receiving significant returns on a risk-free asset class. They can not only lower volatility in their overall portfolios but mitigate the erosive effects of high inflation, which peaked at 10.5% in December.
Though that figure edged downwards in February, the war in Ukraine is showing no signs of ending, and the conflict will likely continue to exert inflationary pressure on both energy and food prices in the UK.
Volatility in investment portfolios
Domestic economic environment
Cost of living crisis
Ease of access
Liquidity
Geopolitical concerns
For future investment opportunities
Manage cash for emergency and short-term use
Feel safer in a safer asset class
Before pension drawdown
Cash versus emotions
How investors use cash, and how they behave around it, are underpinned by values such as safety, familiarity, and stability that they associate with the asset class.
Market declines are often emotional for investors, and they can trigger feelings of worry and anxiety, as we saw in September 2022 when former British Prime Minister, Liz Truss, announced a controversial mini budget that roiled gilt markets and caused the FTSE 100 to shed almost 2%. These events can be powerful springboards for conversations around cash between advisers and their clients.
Reasons why people invest in cash in 2023
Find out more from Flagstone
A resurgent interest in cash isn’t surprising. For most investors, there is a good argument to make a case for cash as part of a healthy investment portfolio. Cash offers a liquid buffer against unexpected life events and fills gaps in cashflow. Some investors build-up cash piles alongside their investments to help children or grandchildren with educational fees or house deposits.
However, the past few years have brought rolling crises which show little sign of abating and the case for cash as a safe haven has become stronger than ever. From Covid halting the economy in 2020, to the war in Ukraine in 2022; investors in 2023 are grappling with a potentially recessionary outlook in economies where central banks are raising rates to fight inflation. There are also concerns as to what China’s reopening from Covid-19 restrictions means for global energy, commodity, and goods demand and if this could lead to a further uptick in inflationary risk.
An adviser-led conversation
part two
%
40%
Such scenarios tend to mean clients want their money in safer assets in the short term, or until economic confidence improves enough for them to invest cash in stocks or bonds again.
This is a view echoed in our survey which saw advisers name the cost-of-living crisis, global recession, and UK inflation as the most ‘top of mind’ issues for 2023. It is no surprise that almost half of advisers said there will continue to be an investment case for cash over the next 12 months.
Moreover, higher interest rates, eroding confidence in financial markets, and lackluster returns from equity markets would support the case for cash for longer as well.
What issues are top of mind for 2023?
Cash advisers:
70
Stubborn UK inflation
Geopolitical tensions
UK recession
Other
31%
15%
6%
8%
“There is a strong investment case for cash over the next 12 months”
Cash advisers:
In both the inexperienced and experienced groups is the client who is nearing retirement age or who has already retired, and for whom cash plays a much larger role in portfolios.
47
%
47
%
46
%
39
%
29
%
12
%
3
%
strongly agree
strongly disagree
neither agree nor disagree
somewhat agree
somewhat disagree
Experienced investors
Inexperienced
investors
Comfortable making their own decisions
More likely to work with IFAs to manage their money
Have time and interest in managing their money
Have experienced economic cycle highs and lows
Built up retirement pot via employer pensions/ wealth via inheritance
IFAs may need to educate them about investing/growing their wealth
Look at cash as security, protection, stability
Often want emotional assurance that they have cash for a rainy day
Our research identified two different groups that advisers work with when it comes to cash:
Moving to cash is a welcome port in such economic storms – and the rise in interest rates only makes it more attractive to clients. But our research finds that cash is still an adviser-led conversation, with two-thirds of advisers saying they bring it up more often than their clients do.
Advisers recommend their clients have a healthy emergency fund and keep the rest invested in higher return profile assets such as equities. This is especially true amongst people who are in the accumulation phase of wealth building, and are able to invest over the medium-to-long-term.
In general, the lower the risk profile of a client, the more relevant cash becomes. The age and goals of a client often play a large part in this.
Who tends to raise the topic of cash when it comes up in conversation with your clients?
Cash advisers:
12
%
47
%
Half me
18
%
2
%
Always clients
1
%
Always me
Mostly clients
Mostly me
Other
Clients who are nearing retirement or already retired tend to hold more cash, as part of a drawdown arrangement or for liquidity ahead of retirement.
This cohort of clients holds, on average, around 16% to 17% of their wealth in cash – typically in a bank-led savings account. The cash buffer for this group provides anywhere from a few months to two years of cash savings.
This allocation is set to grow further in 2023 and beyond, with retired or nearly retiring clients more interested in holding cash now as opposed to in 2021.
Cash in retirement
66
of advisers’ retiring or retired clients want to hold more cash
Holding large amounts of cash means investors have more security against potential losses in volatile markets so close to retirement. It also provides the liquidity needed to avoid selling investments at a loss. Alternatively, cash can be seen as an offensive asset, allowing investors a liquidity reserve to take advantage of stock market lows and buying opportunities.
For example, when the S&P 500 declined by more than 20% in March 2020, those investors holding cash could take advantage of the buying opportunity. Those that were able to were rewarded when stocks strongly rebounded to reach new highs later that year.
%
73
of advisers say this number is growing
%
On balance, are your retired / retiring clients more interested or less interested in holding cash now, compared
to 2021?
Cash advisers:
Cash advisers:
41 - 50%
21 - 30%
11 - 20%
1 - 10%
The way investors use cash in retirement varies depending on their needs and pension arrangements. Most retirees will keep their day-to-day cash requirements in easy to access accounts, with financial advisers recommending a cushion of anywhere from six months to two years.
Retirees with adequate income from defined benefits pensions could be looking for more growth and may require less of a hedge. However, retirees with pensions invested in the stock market will need to keep a robust cash buffer to shield them from incurring losses during a market downturn.
While the average bear market is about nine months, the tech bubble bear market in 2000 was two and a half years in duration and more recently, the bear market following the global financial crisis in 2008 lasted for one and a half years. A full market recovery can take longer, and in some cases, up to five years.
Most retirees won’t have all their investments in the stock market, so the duration of portfolio recovery would depend on risk appetite and allocation to stocks, bonds, and other assets. Historically, a balanced portfolio of 60% equities and 40% bonds would have provided enough of a cushion against market downturns, but 2022 showed that stocks and bonds, although rarely, do fall in tandem.
WHAT ABOUT THE BANK OF MUM AND DAD?
The largest inter-generational wealth transfer has already started with £1 trillion in wealth estimated to be transferred from the Silent Generation and Baby Boomers to younger generations.
Retired baby boomers are the wealthiest cohort and hold the most cash both for their own liquidity reserves and for gifting to family. As the children of retirees find it increasingly difficult to get on the property ladder, research by the real estate company Zoopla , showed that the Bank of Mum and Dad is one of the UK’s biggest mortgage lenders. Where they keep this cash reserve for the lowest amount of risk is key to them maximising returns.
51 - 60%
31 - 40%
64
%
£32,440
of parents whose children own a home, helped them get on the property ladder
was the average amount put towards a house deposit
gave their children more than £50,000
14
%
Our research shows 82% of advisers’ retired/retiring clients hold most of their cash in bank accounts which is no surprise as the Bank of England’s monetary tightening policy has driven variable interest rates to a 14-year high, and some providers are offering rates as high as 4.51%* on cash holdings.
The increase in rates has driven more providers into the market, resulting in increased optionality, high competition, and increasing complexity around product offerings.
How could advisers earn more for their clients with cash?
For example, technology enabling cash platforms have gained traction in recent years by offering another avenue for investors to access the highest rates of interest. Cash platforms’ ‘pick and mix’ style of savings in different banks and accounts is known to be one of the best ways to deposit cash into the highest earning savings rates.
Cash platforms are for cash-rich, but time-poor investors and the ease with which they can sign up to a single platform means investors are able to switch their cash between providers to get the best rates without signing up to new banks each time. Most platforms offer a range of rates, but often beat the typical high street bank accounts.
65
of cash advisers say they are seeing more cash products in the market now compared to two years ago
%
40
%
“
Clients find that the array of options in cash can be quite bewildering. People are going to be confused easily because
— Independent financial adviser
all the providers will have different terms.
Zoopla research, 2021
1
1
Anecdotally advisers say they are increasingly looking at these type of services for – rates but also greater visibility of client cash.
What do advisers think of cash platforms?
Pros
Cons
easy to secure consistently competitive rates
exclusive rates
less admin
FSCS covered up to £85K for each banking institution
higher minimum investment amounts
some charge fees
FSCS covered or not
Slightly more
Significantly more
Slightly less
Significantly less
Don’t know
No difference
55
24
13
%
6
%
2
%
0
%
5
%
32
%
24
%
36
%
1
%
1
%
%
are having to spend more time helping their clients sift through these options
20
%
Weakening housing market
Energy crisis
Global recession
Cost of living crisis
How much wealth do retirees hold in cash?
%
%
interest income per annum
£14.6k
2.87%
blended rate
Interest Rate
100% of the £510,000 is FSCS protected
Flagstone
0.30%
Interest Rate
15% of the £510,000 is FSCS protected
e-Saver
£510k
savings deposited in Feb 2023
Investors using Flagstone, can spread their money across several accounts and receive the £85,000 protection each time (or £170,000 for joint accounts).
In this case study, we’ll look at how Mr. & Mrs. R achieved peace of mind while maximizing earnings on their cash deposits.
Mr & Mrs R’s savings if deposited with their bank, would have earned just 0.30%, generating £255 per annum interest.
After receiving Mr & Mrs R’s application, their Flagstone account was opened within 48 hours. Using the intuitive filters and portfolio builder tool, they spread their money across three accounts, with different banks, in just a few clicks.
Mr & Mrs R’s funds now earn ten times more interest income (before fees) and they have peace of mind that every penny is protected by the FSCS (Financial Services Compensation Scheme).
Here’s how a Flagstone deposit can add up to nine times more income and £340,000 of additional FSCS protection:
EXPLORE OUR TOOL
Portfolio builder tool
“
Since the market’s been so unstable and for our clients who want security, the FSCS scheme and
— Independent financial adviser
spreading money around is where we have seen a big focus.
As investors have become more cautious, Financial Services Compensation Scheme (FSCS) protection has become increasingly important over the last few years. Most recently, start-up focused lender, SVB Financial Group collapsed on March 10 after it announced it needed to raise capital. The US government stepped in to guarantee cover for the bank’s deposits and the UK arm of the bank was bought by HSBC, Europe’s largest bank.
CASE STUDY: Peace of mind is priceless
of advisers say that clients are holding out for higher rates
Rate chasers
58%
Without a doubt higher interest rates are a potent driving force for strategic cash investors. Our research revealed that advisers identify a number of their clients as “rate chasers.”
These clients prioritise getting the best rate possible, even if it means holding back from putting money into a fixed-term account now because they expect further rate rises.
To do more for their rate-chasing clients, advisers shouldn’t miss the opportunity to identify leading interest rates on the market by looking at options outside of traditional savings accounts.
What Clients Want
T&Cs challenges
Advisers say there are numerous
reasons that comparing the T&Cs in cash products has become more difficult.
“Go back a few years and most cash products were fixed or variable rates. Now, more products have other restrictions, like allowing a limited number of withdrawals a year which makes it harder for clients to compare without advice.”
“The devil is in the detail when looking at cash products.”
“T&C's are like a foreign language to clients, and they are getting longer than is necessary”
“Most clients don't spend the time drilling down into the detail of cash accounts other than the interest rate and withdrawal terms.”
“
Terms and conditions are very important. The way a lot of savings products are marketed isn’t particularly transparent because they’ll put up a rate that can only be obtained if you meet all the criteria.
— Independent financial adviser
Sometimes that’s in the small print.
neither agree nor disagree
somewhat agree
strongly agree
strongly disagree
unsure
somewhat disagree
40
%
33
%
9
%
9
%
6
%
3
%
“The task of comparing the terms and conditions of one cash product to another is becoming increasingly difficult for clients”
Cash advisers:
Our research shows that just under half (42%) of the cash advisers we surveyed agreed that the task of comparing the T&Cs of one cash product to another is becoming increasingly difficult for clients – this is over three times as many advisers as those who disagreed.
The Devil is in the Details
“
It comes down to where you’re placing the client’s money. If you’re using a large insurance-type company, it’s not easy. If you’re using a platform, it’s easier because
— Independent financial adviser
they normally have a good choice, especially of term deposits.
Advisers should be adding value at this juncture by distilling down the cash account options, reducing any onboarding friction for clients and making that entire process as intuitive and easy as possible. However, this does not seem to be the case.
43
of advisers’ retired clients prefer to invest with brands they trust, even if there are better opportunities elsewhere
%
5 year fixed term
4.51%
(Gross rate)
12 month fixed term
4.30%
(Gross rate)
95 day notice
3.65%
(Gross rate)
instant access
3.20%
(Gross rate)
With so much choice in front of them, could advisers be missing an opportunity to find the best cash solution for their clients?
More options of where to invest cash and little differentiation increase the risk of clients reacting to this complexity by simply choosing brands they are familiar with regardless of whether it is the best choice for them.
Cash platforms solve much of this complexity by having one application process for one account, which then gives investors access to a variety of accounts, and depending on the platform, exclusive and marketing leading interest rates. Investors can then choose and switch their accounts in order to find the best rates and spread their cash around to keep more protected by the FSCS.
For example, Flagstone, is the UK’s leading cash deposit platform partnering with 55 banks to offer hundreds of accounts and market-leading and exclusive rates all on the same accessible and transparent platform. Clients can spread their cash across multiple accounts and have full visibility and control across accounts.
Advisers have read-only access to Flagstone accounts. This gives them real-time access to their clients’ deposits and visibility of when maturities are coming up, giving them a holistic view of their clients’ cash portfolios.
Cash platforms:
A missed opportunity?
part three
The case for cash has re-emerged over the past few years and it will remain a compelling one with slowing growth, an ongoing war in Ukraine, and high inflation remaining at the top of the agenda.
Investors are now holding more cash than ever and the wealthiest cohort in the UK – retirees – are interested in holding even more cash as market volatility and economic uncertainty sap their appetite for riskier assets.
Cash is an inevitable asset class, but inertia in the cash savings market, coupled with the rising complexity in products offered to solve that inertia has present challenges for both advisers and their clients.
This study shows those challenges are not insurmountable; advisers can put their clients’ cash to work for the best returns over the short and medium term, while also prioritising security and comfort in an unfriendly market environment.
Our findings cannot underscore enough the clear disconnect between the leading interest rates cash deposit platforms like Flagstone are offering, and the inertia seen on deposits in bank accounts - where the majority of advisers’ clients are holding their cash.
A cash deposit platform can make all the difference by offering not only leading interest rates, but also security and transparency. This holistic view of an individual’s cash strategy ultimately allows them greater flexibility and peace of mind.
With cash allocation set to grow further in 2023 and beyond, advisers cannot afford to overlook a robust strategy for this inevitable asset class.
The conundrum becomes clear
Conclusion
Flagstone rates as of 27.03.23
A good element of 4%-5% return for no downside investment risk.
Keeping powder dry for correction in property market.
Global economic situation and the war in Ukraine.
Liquidity and diversification.
Uncertainty and how long the cost-of-living crisis will continue.
“
The case for cash: Advisers’ views
16.7%
Mean allocation
*Rate correct as of XX/04/23
Terms and Conditions apply
Introduction
The cash agenda
The missed cash opportunity
Conclusion
Advisers versus cash
Introduction
The cash agenda
The missed cash opportunity
Conclusion
Advisers versus cash
High street bank
3 instant access accounts
interest income per annum
£1.5k
