6 Common Mistakes Advisors Make in Cash Allocations and Liquidity Management

Do you know the most common liquidity pitfalls for advisors and key discovery questions to help you form a strategy that fits the unique goals of your clients? This blog takes a quick look at mistakes financial advisors sometimes make when helping their clients navigate the need for cash.

Understanding Liquid Assets

Simply put, liquid assets are assets that can be quickly and easily converted into cash. While clients can readily turn these assets into cash, liquidating long-term holdings to meet short term needs can result in a loss in value and can have material tax implications.

This is why most financial advisors recommend the following strategy to clients to help maintain financial stability and stay on track to achieve their long-term financial goals:

• Build an Emergency Fund 
  Set aside enough cash in an emergency fund that covers ~6-12 months of living expenses.

• Set Up Short-Term Savings Goals
  Plan for upcoming expenses or goals within the next 1-3 years (e.g., vacation, down payment, new car) by designating funds to a cash account or investments with little risk of loss.

Structuring cash effectively is key to helping your clients meet their short and long-term financial goals. 

Now let’s look at common mistakes and how advisors can structure a custom solution to meet clients’ needs.

6 Common Mistakes in Cash Allocations and Management

While cash management is a fundamental aspect of financial planning, investors often fall prey to common mistakes that can hinder their overall financial well-being. Recognizing these pitfalls can help individuals make more informed decisions and optimize their cash strategies. As an advisor, you should know these common mistakes and help your clients plan accordingly.

Holding Excessive Cash

One prevalent mistake is holding too much cash. While maintaining a portion of cash for immediate needs is essential, excessively high cash holdings can lead to missed investment opportunities and eroded purchasing power due to inflation.

Holding Too Little in Cash

Conversely, holding too little cash can be a mistake, leaving investors vulnerable to unforeseen expenses or emergencies without adequate financial reserves. Insufficient cash holdings may force individuals to liquidate investments at inopportune times or resort to debt to cover immediate needs.

Holding Too Much Cash at Banks Paying Low Rates

Keeping substantial amounts of cash in low-yield accounts, particularly in a low-interest-rate environment, can lead to diminished returns over time. Exploring higher-yield alternatives for cash holdings can be more beneficial for investors.

Not Reassessing Cash Allocations Regularly

Financial circumstances change over time, and failing to reassess cash allocations regularly can lead to suboptimal cash management. Investors should regularly review their cash needs, risk tolerance, and market conditions to ensure that cash strategies remain aligned with their evolving financial goals.

By being mindful of these common mistakes and incorporating prudent cash management practices, investors can help safeguard their financial well-being, potentially maximize returns, and maintain a balanced approach to cash allocation within their overall investment portfolio. 

Key Discovery Questions for Effective Cash Management 

A simple discovery conversation between financial advisors and investors is essential to developing personalized and effective cash management strategies. The following questions are specifically designed to unveil key insights and preferences related to cash management, guiding advisors in crafting tailored solutions that help optimize liquidity, safety, and returns.

• What are the expected expenses or investments you anticipate in the next 24 months?
  • What is the size of each expense or investment? 
  • Is there a known date or general timeframe for each expense? 
  • Are you willing to take any risks with some of these funds for potentially higher returns?  
• How much cash do you currently hold, and in which cash vehicles (e.g., bank accounts, CDs, bonds)? 

By asking these insightful discovery questions, financial advisors can gain invaluable insights into their investors' needs. Then, advisors can construct a comprehensive cash management strategy that aligns with the investor's financial objectives. 

The next step is to identify the right solutions for the cash strategy. By first, focusing on when the funds will be needed and the appropriate risk level, then finding the vehicles with competitive returns within the investors’ need for the cash and their risk preference.

Here’s an overview of the AssetMark Cash Solutions suite.

Engaging with cash can help improve financial outcomes for clients and grows your business

Cash is a big asset class, especially for high-net-worth clients. Cash accounts for ~13% of an affluent client’s assets¹ and ~34% of ultra-high-net-worth client’s assets². If you’re not addressing your client’s cash holdings, you could be leaving an opening for other advisors or institutions to win this business from you. Our enhanced solutions empower advisors to capitalize on the estimated $8 billion share of wallet opportunity within wealth client cash holdings.

AssetMark Cash Solutions suite transcends traditional “rate shopping” by equipping advisors with compelling products, professional guidance, and robust resources necessary to engage in consultative conversations about clients' short-term funding needs and goals. Our expanded suite helps advisors enhance client outcomes by improving portfolio diversification, managing cash flow, and optimizing short-term funding needs.

6808633.1 | 08/2024