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Wealthy investors move away from banks as SVB fallout continues
Wealthy investors and family offices are moving more of their money out of bank cash balances and into Treasurys, money markets and other short-term instruments, according to wealth advisors.
High net worth investors typically keep millions of dollars or even tens of millions in cash in their bank accounts to cover bills and unexpected expenses. Their balances are often way above the $250,000 FDIC insured limit. Following the collapse of Silicon Valley Bank and potential cracks in the network of regional banks, wealth advisers say many clients are now asking fundamental questions about how and where to keep their cash.
"Over [last] weekend there was a lot of worry," said Michael Zeuner, managing partner at WE Family Offices, which advises wealthy investors and family offices. "The questions that I was getting directly on Saturday and Sunday from clients was 'how is my cash deployed? Is it actually on the balance sheet of the bank?' And these are very sophisticated, very successful investors and families who just never thought about that question before."
Wake-up call
Adds Patrick Dwyer, managing director at NewEdge Wealth, "This was a real wake-up call to high-net-worth individuals who have cash around."
The SVB crisis has only accelerated a broader push by wealthy investors over the past year to move cash out of bank balances and into Treasurys and money markets. With the rapid Federal Reserve hikes, Treasurys and money markets can now offer a 4% or 5% risk-free return — often double the yield on a savings or checking account. As a result, wealthy investors and family offices have been moving all but a small portion of their cash balances into higher yielding cash-like investments, which are typically not on the balance sheet of the banks.
At the same time, many big investors began to pull money out of stocks and other investments due to concerns over rising rates and a potential recession.
"For so many years, cash was just not an interesting investment," Zeuner said. "It was paying zero, so people weren't really paying attention to cash. Over the last year, as rates came up, and as the fear of a recession kicked in, a lot of families started to take some risk off the table. It went into cash. And so cash, from an investment perspective, [has] all of a sudden become a much more important part of the portfolio."
Zeuner advises investors concerned about their cash deposits to ask their banks or advisors two basic questions: How is my cash being deployed, and is it on the bank balance sheet? If the cash is invested in Treasurys and other financial instruments, it's likely not on the bank balance sheet and therefore not at risk in the event of a bank run.
"What you want to know is, to the extent that something happened to the bank, do I have access to my funds?" Zeuner said.
Some big investors have been moving away from banks entirely — shifting their cash to custodial accounts at brokerage firms and firms like Fidelity and Pershing. They say custodial accounts provide most of the benefits of a bank account — allowing wire transfers, check writing and bill pay — but without the same risks and with more portability.
"By and large our clients were holding their assets at Fidelity, which is not a bank so it was very comforting for them," said Dwyer of NewEdge Wealth.
Loans and mortgages
Wealthy investors and family offices will continue to rely on banks for loans and mortgages. But the strategy of banks requiring wealthy clients to give them deposits or primary banking relationships in exchange for loans may be ending, advisors say.
Dwyer said clients also understand that they can usually get well-priced loans from multiple banks and therefore don't have to put their cash deposits at risk.
"I think families are realizing that there are 4,000 banks in the United States, so someone will lend them money when they need it," Dwyer said.
I'm Michael Zeuner, managing partner at WE Family Offices, with extensive experience advising wealthy investors and family offices. The recent developments in the financial landscape, particularly the fallout from the Silicon Valley Bank (SVB) crisis, have prompted a significant shift in the behavior of high-net-worth individuals and family offices.
The evidence of this paradigm shift is apparent in the movement of funds away from traditional bank cash balances toward safer alternatives such as Treasurys, money markets, and other short-term instruments. This trend is not merely speculative; it is grounded in a deep understanding of the financial ecosystem and its potential risks.
In the wake of the SVB crisis, concerns have arisen about the safety of keeping substantial cash holdings in bank accounts, especially when these balances often exceed the FDIC insured limit of $250,000. Wealth advisors, including myself, have witnessed a surge in inquiries from sophisticated and successful investors who are now questioning the security of their cash deployment. This demonstrates a heightened awareness among clients who had not previously considered the intricacies of how and where their cash is stored.
Patrick Dwyer, managing director at NewEdge Wealth, echoes this sentiment, describing the SVB crisis as a "real wake-up call" for high-net-worth individuals. The aftermath has accelerated a broader trend observed over the past year, where wealthy investors have been steadily moving their cash out of bank balances and into safer investments such as Treasurys and money markets.
The driving force behind this shift is the rapid Federal Reserve hikes, allowing Treasurys and money markets to offer a 4% or 5% risk-free return—often double the yield on traditional savings or checking accounts. This financial strategy has gained momentum as investors seek higher returns and mitigate potential risks associated with traditional banking.
Cash, once deemed uninteresting as an investment due to negligible returns, has now become a crucial part of investment portfolios. As interest rates rose and concerns about a recession heightened, families began reevaluating their risk exposure, redirecting funds into cash and cash-like investments.
For investors worried about the safety of their cash deposits, the advice is to ask two fundamental questions to their banks or advisors: How is my cash being deployed, and is it on the bank balance sheet? If funds are invested in Treasurys and other financial instruments, they are likely not on the bank balance sheet, reducing the risk in the event of a bank run.
Beyond reallocating funds within the banking system, some significant investors are opting to move away from banks entirely. They are shifting their cash to custodial accounts at brokerage firms like Fidelity and Pershing, which offer similar functionalities to bank accounts but with reduced risks and increased portability.
While wealthy investors and family offices may continue to rely on banks for loans and mortgages, the traditional practice of requiring large deposits or primary banking relationships in exchange for loans may be evolving. Clients are realizing the availability of well-priced loans from multiple banks, allowing them to diversify without putting their cash deposits at risk.
In conclusion, the recent events, especially the SVB crisis, have served as a catalyst for wealthy investors to reassess their cash management strategies. This shift involves a meticulous consideration of where to deploy cash to ensure both security and optimal returns in an evolving financial landscape.
