March 4, 2024


We tend to think of bank failures as once-in-a-lifetime events, such as the 2008-09 financial crisis or the Great Recession.

Gary Zimmerman

Gary Zimmerman is the CEO of MaxMyInterest, a cash management service for investors.

Sadly, this is not the case. 564 banks have failed since 2001, or an average of more than 25 per year. While the majority of these failures (389) occurred between 2008 and 2010, there were only five years (2005, 2006, 2018, 2021 and 2022) during which there were no bank failures. Recent bank failures have attracted great attention, not because of the rarity of such events, but because of the size of these failed institutions: First Republic Bank, Silicon Valley Bank and Signature Bank They were the second, third and fourth largest bank failures in U.S. history, second only to the failure of Washington Mutual in the early days of the Great Depression.

Given the relative frequency of bank failures, financial advisors would be wise to advise their clients where and how to store their cash, just as they do in other areas of their financial lives. Federal Deposit Insurance Corp. guarantees bank deposits up to $250,000 per depositor, per account type, per bank charter.If depositors exceed these limits, a portion of their savings is unsecured, meaning that in the event of a bank failure, customers may not be recoverable All their cash. Since customers hold cash primarily for safety and liquidity, they should not take any risk with cash. Fortunately, there are solutions available This helps clients keep their cash balances fully insured and liquid. In the process, customers can also obtain higher benefits.

Beware of Brokerage Deposits
For years, banks and brokerage firms have tried to centralize customer relationships by offering cash-clearing programs that promise increased FDIC insurance coverage through the use of depository brokers—and earn some pocket money in the process. They are increasingly targeting these schemes at registered investment advisory firms. Unfortunately, these programs expose customers to security and liquidity concerns.

Under the brokered deposit program, financial institutions (sometimes fintech companies such as robo-advisors or crypto trading platforms) promise to provide their customers with increased FDIC coverage by spreading deposits across other banking networks. In doing so, the originator earns a fee by reselling the client’s cash. But no matter how simple or clever such a program sounds, the fine print reveals several problems with this market-based structure.

First, deposits are held by the originating institution in a master omnibus account. If the institution fails, all funds may not be available to depositors until the resolution process is complete, which may take days or weeks (or longer if the fintech company hosting the funds goes bankrupt). Last year, the FDIC issued cease and desist letters to five cryptocurrency companies for providing “false and misleading statements.” One company on that list is FTX, a now-defunct $32 billion cryptocurrency exchange. If you see the words “synthetic” or “custodian” in the fine print, you may be putting your client’s funds at risk by taking on the risk of a single point of failure – a risk that can be avoided entirely by avoiding brokerage deposits .

Second, because customers using brokerage deposit programs have no control over which banks their cash is sold to, they may inadvertently exceed FDIC limits if they already hold cash deposits at one of the banks that are part of the depository broker’s cash clearing network. In such cases, cash that the customer believes to be fully insured may not be insured, exposing the customer to unnecessary risk.

Finally, as with many fee-for-service products, agency deposit arrangements create an inherent conflict of interest, as the bank or brokerage that brokers the deposit charges a portion of the interest on top – a hidden fee that is often not disclosed to clients . client. The result: clients earn less than they would earn elsewhere, while the custodian or broker makes a fortune. This advertised “free” product isn’t free at all; the fees are simply buried and obfuscated, to the customer’s detriment. While this may fit the business model of a broker-dealer, RIAs have a fiduciary duty to their clients and should therefore be aware of the products they offer.

Brokerage deposits are advertised as a great way to gain yield and protection. But the reality is that these services aren’t maximizing either – with all the embedded fees, they leave customers with less revenue than they earn themselves, while exposing customers to additional risk if they’re just trying to move cash Deposit in your own bank account, held directly in your own name.

Diversify client cash
Clients who choose to hold large cash reserves do so in search of safety and liquidity. If customers cannot immediately use cash to make important purchases, pay taxes, meet capital requirements, or purchase securities when the market falls, they are defeating the purpose of maintaining large cash reserves in the first place.

When managing large amounts of cash, the best way to protect customers’ savings is to ensure their funds are held directly in their own name, spread across several FDIC-insured financial institutions, with intraday liquidity and no single point of failure.

While cash may seem like an easy asset class, keeping it safe and liquid is critical. Since not all cash management methods are created equal, it pays to read the fine print.