Client Relationship & Service
Cash is a proxy for uncertainty. And when investors leave cash on the sidelines, they could be missing out on future opportunities and potentially putting long-term goals at risk.
“Some of the most uncertain times — Fed hikes, inflation, disappointing earnings — have been inflection points. In hindsight, these events were opportune times to reallocate cash in client portfolios and align them to their objectives,” says Mike Gitlin, head of fixed income at Capital Group.
With a record amount of assets sitting in money market funds and a high-yielding cash environment, your clients may be unsure if the time is right to reinvest that cash — or how to deploy it. Cash can play an important role for unexpected emergencies, such as a job loss or unplanned expenses, but excess cash can be a headwind for long-term goals.
“One of the most difficult aspects of an advisor's job is managing clients through challenging times, keeping them from acting on fears that may get in the way of their long-term success” says Chris Jenkins, a wealth management consultant at Capital Group. “Your clients may need a nudge to help them deploy cash into investments better aligned with their long-term goals, and the conversation offers a great opportunity to demonstrate your value and deepen relationships.”
When these conversations come up, it helps to have a systematic and repeatable approach. For example: There are four steps to any effective client conversation, each with a distinct goal. “First, acknowledge where the client stands. Second, provide your perspective. Third, build confidence. And fourth, share any potential opportunities,” explains Max McQuiston, an advisor practice management consultant at Capital Group. “This framework can be used in any discussion but is particularly useful in times of risk aversion or market volatility.”
Four steps to more effective conversations
Here’s how to talk to clients about the benefits of moving out of cash in four easy, efficient steps.
When market uncertainty runs high, it’s natural for investors to have concerns about their portfolios and to take a defensive position when fearful. Simply acknowledging these fears and being ready to listen to clients’ concerns can be meaningful. Active listening is key.
“Proactively have the conversation with clients with higher-than-usual cash balances,” says McQuiston. “You want to let them know you take their concerns seriously. Let them feel heard. But you also want to remind them to consider the long term.”
Conversation starters: Empathize, listen and identify
“Today’s historically high cash balances provide a great opportunity to reengage clients on some timeless investment themes,” says Jenkins. “That includes ideas such as ‘preservation of capital vs. preservation of living’ and ‘it’s time in the market, not market timing that matters.’”
When offering perspective on investing cash, you can help clients understand that we may be at a pivotal moment in the markets. The U.S. Federal Reserve (Fed), with a goal to dampen inflation by tightening monetary policy, led to a selloff in both equities and fixed income last year. But now, the Fed appears to finally be pulling back. This changes everything.
The long-term history of short-term market surges
Providing historical context can also help investors better process today’s market uncertainty and their retreat to cash. Remind clients that we have been here before. As illustrated in the chart above, we saw run-ups in cash during the global financial crisis and again during the COVID pandemic.
Remind clients that in both these cases, total returns of the S&P 500 rebounded strongly, though past results are not predictive of results in the future. But investors who waited too long in cash missed a 55% rebound in the first six months after the S&P trough ending in March 2009, and 46% in the first six months after the S&P 500 trough in March 2020. In other words, the opportunity costs were significant.
You may also remind clients how yields on cash decayed quickly following a last Fed hike. Over the last four rate hike cycles, U.S. three-month T-bill rates were an average of 2.5% lower 18 months after the last Fed hike. That means that the relatively attractive money market yields currently on offer may drop sharply once the Fed changes course. That said, it’s also good to remember there is risk of loss for stock/bond investing unlike investing in U.S. government bonds or CDs (certificates of deposit), which are guaranteed.
Conversation starters: Share and educate
“The confidence step is about bringing your clients back to the long-term goals you know matter to them,” McQuiston says. “It's about focusing on what is within their control. Reassure the client that a plan is still in place, but it may be time to reconfirm priorities.”
Ask clients to talk about their goals and remind them of the progress they have made. “Let them know: ‘You have made smart, responsible decisions in managing your money, so now let's discuss what matters to you most: your goals,’” McQuiston says. “Remind them that you developed these objectives together, perhaps during a calmer time. Discuss specific objectives clients established and reinforce that changes in market conditions likely haven’t changed their goals.”
Conversation starters: Prioritize client goals
“Investor emotions are real. Past losses sting for a long time, and today’s seemingly attractive rates on CDs and money markets feel good,” says Gitlin. “But as investors, we know that markets don’t idle for long. You could become stuck in cash if you wait too long to get back into the market, as better potential opportunities emerge.“
Having this type of conversation offers a chance to guide clients to consider prudent and perhaps opportunistic financial moves.
Discuss how to begin putting cash back to work:
The case for redeploying cash into bonds:
The case for equities. In particular, balanced strategies and dividend payers:
Conversation starters: Give action steps
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