01

The opportunity cost of idle cash

For advisers, now is the time to actively manage cash allocations. The cash rate is at its highest in over 10 years, and yield curves are relatively flat – which means there is currently little premium for taking a longer-term risk on bonds.

With a holistic view of each client’s cash requirements and holdings, you can see opportunities to optimise client returns, and in turn share insights to strengthen relationships.

“Cash and fixed income investments are the ballast in a diversified portfolio,” says David Carruthers, Investment Strategist in Macquarie’s Banking and Financial Services group. Cash can help reduce the impact of market volatility and protect against losses. It also provides essential liquidity.

In the current market, idle cash could be missing out on greater returns – or delaying clients from achieving their wealth goals.

“Our latest outlook indicates we are now at, or close to, the peak of interest rates. Whilst many global central banks have already started to reduce cash rates, Australia may be delayed a touch longer due to a more stubborn inflationary backdrop,” says Carruthers. “The RBA remains vigilant to any more upside surprises on inflation and can afford to wait until February 2025 to ultimately lower the cash rate.”

Cash has always played a critical role in a diversified investment portfolio. In times of uncertainty, investors see cash as protection against risk – yet they may not perceive cash as an asset requiring advice.

This guide explores the current cash opportunity. It will help you have meaningful conversations about cash management with your clients and make the case for greater visibility of their total cash holdings.
 

02

Defining active cash management

David Carruthers says there continues to be a heightened sense of uncertainty about the economic environment, along with uncertainty over when cash may be needed – even among high-net-worth investors.

“You need to get the balance right. Just as you would with any part of your investment portfolio, it’s important to rethink what is locked away at a higher rate, and what you might need for short-term payments.”

Broadly speaking, we can establish a framework with three types of cash:

“Keeping track of cash flow and leaving a sufficient balance will help avoid the need to sell an asset at the wrong time or call on a term deposit before maturity,” says Will Moloney, Senior Technical Services Manager. 

“A client’s cash flow requirements may change from year to year, so engaging your client in that discussion will assist in meeting their needs,” he explains.

That’s why it’s also never been more important for advisers to have visibility across all cash holdings.

03

How is the appetite for cash changing?

Since 2020, investors have shown an increasing preference for stability. According to the 2023 ASX Investor Study, 67% of investors say they prefer stable or guaranteed returns.

Self-managed super funds (SMSFs) are even more inclined towards capital preservation and income generation. On average, 22% of SMSF assets are allocated to cash – across transaction accounts, cash management accounts (CMAs) and term deposits. The proportion of SMSFs holding money in CMAs has surged in the past year, and 33% of SMSFs intentionally increased cash allocations in 2023.¹

Cash is also popular among high-net-worth investors, with 40% of Australia’s private banking clients allocating funds to cash or cash equivalents and 37% investing in money markets, fixed interest and bonds.²

But not all cash is ‘zero-risk’ cash. Only deposits with ADIs (Authorised Deposit-taking Institutions), and up to $250,000 per account holder per ADI, are government-guaranteed per the Financial Claims Scheme (FCS).

When rates were close to zero, investors chasing higher yields found themselves moving further up the risk spectrum into cash-equivalent investments – at a liquidity cost. Cash equivalents include term deposits and investments which are defined by APRA as “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.”

However, other income-producing assets – such as corporate bonds or residential mortgage- backed securities – don’t meet the definition of cash.  While Australian hybrid security holders are typically protected from the collapse of these assets, it is a timely reminder of the risk of chasing yield.

Weighing up cash options

Bank accounts – transaction or savings accounts which pay interest regularly and provide unrestricted access to funds. This convenience can come at a cost: once inflation is factored in, the real return on at call cash could be negative. There is also a concentration risk for holding large amounts of cash with a single ADI.

Cash management accounts (CMAs) – as a cash investment hub, a CMA provides the benefits of a transaction account with greater visibility and control for advisers. Some, like Macquarie's Cash Management Accelerator Account linked to Macquarie’s CMA, may offer higher interest rates than an everyday bank account. They may even compare favourably with a term deposit without sacrificing liquidity.

Term deposits – with a fixed rate of return, investors often see term deposits as a disciplined way to save money. Terms can range between one month and five years, and if funds are accessed early there may be a ‘penalty’ in the form of lost interest or a break fee. Term deposits with an ADI are eligible for the $250,000 per client government guarantee.

Cash alternatives – some managed funds could be considered as ‘true-to-label’ cash and can act as a cash alternative in a portfolio. For example, the Macquarie Cash Fund (MCF) offers an actively managed transactional cash solution provides exposure to a portfolio of highly rated cash and short-term fixed interest securities issued by government or bank entities. The FCS does not apply to cash funds.

It’s important to check whether some funds labelled ‘cash’ are authentic alternatives to cash, or align more with the characteristics of income funds, as this could expose clients to liquidity or capital risk³.

04

Actively managing liquidity

It has never been more important to understand your clients' expenditure and time horizons, especially if they are feeling uncertain in the current economic climate.

“Running out of money is a real risk in retirement,” says Moloney. “When helping clients plan for retirement, it’s important to understand their expected cash flow requirements. For clients who don’t want to run down the balance of their investment assets during retirement, a safe withdrawal rate is usually 2%.”

Retired clients with an SMSF also need to have enough cash on hand to meet pension requirements. And liquidity may be just as important to younger clients with investments outside of super, who may have higher or fluctuating family and living expenses.

Laddering redemption dates can be a useful strategy for term deposits. Instead of depositing one lump sum in a single term deposit, you could spread the capital across different durations. As each deposit reaches maturity, you can decide whether to reinvest or reallocate.

05

Your clients’ hidden pockets of cash

Cash holdings grew during the COVID-19 pandemic, as confidence in equity markets weakened. Household cash reached near historic highs – and at that time, advisers told us they had full visibility over less than half of their client base’s cash holdings.⁴

That’s why there’s a possibility you lack the full picture on all your clients’ cash. And now is the time to check, because the rates that were acceptable in 2021 are not competitive today.

06

Get started with active cash management

Macquarie’s CMA has been a trusted cash hub for over 45 years and is used by one in three Australian SMSFs to manage their money. It can be linked to the higher interest Macquarie Cash Management Accelerator Account, as well as term deposits, for a holistic view across cash holdings.

As a fully integrated cash ecosystem, this makes it easier for advisers to set up a sophisticated cash maximisation strategy, and have more time to focus on more complex investment options.

 All our clients’ cash inflows and outflows pass through their Macquarie CMA. That allows us to measure cash flow quickly and painlessly – and what gets measured gets managed. 

Lisa Kirk
Head of Wealth, Fuse Wealth

For Fuse Wealth, a CMA takes the guesswork out of managing client expenses, as it automates data feeds into XPlan. Third-party authorisations enable advisers to initiate cash transfers, with approval alerts sent to the client’s phone to ensure security. 

Learn how Fuse Wealth uses CMAs to optimise cash allocations, and bridge the gap between advice and implementation. Read more

Cash may be a secure portfolio allocation with relatively predictable returns, but it still needs to be managed proactively – especially in today’s market, where cash flow demands may be less predictable and rates of return vary widely across different providers and cash products.

A cash hub like Macquarie’s Cash Management Account can make it easier for you to proactively manage other investments as well. With liquidity, visibility, security and third-party authority, you can be sure your clients’ capital is working as hard as possible by taking advantage of opportunities as they arise.

Contact us today to learn more about how we can help your business stay ahead.

Learn more about the Macquarie Cash Management Account and Accelerator account.