Are wealth managers' cash services delivering?

The financial crisis and subsequent volatility in markets have presented wealth management firms with fresh challenges in cash management, most notably counterparty risk and ultra low interest rates.

While a number of firms have sought to launch dedicated cash management services over the past 18 months or have seen increased interest in their propositions, are the returns really worth the fees and how effective have the services been at reducing risk?

Edward Allen, a partner at Thurleigh and former Wealth Manager cover star, is slightly sceptical about outsourcing his clients’ cash management to a third party. The firm uses liquidity funds – including the BlackRock Liquidity fund, which is yielding 0.6% – and places money with RBC Dexia and C Hoare & Co, which currently offers a rate around 0.2%. Although this is relatively low, Allen stressed the stability and safety the institution offers (particularly seen during the credit crisis), as the bank is able to deposit capital with the Bank of England.

‘People want to manage currency if they are running cash. Taking a view on currency is currently something we do, so it could be counter-productive,’ Allen said. ‘Where we own cash we want to keep it as plain vanilla as possible.’

Likewise, Tim Wood of McInroy & Wood also prefers to manage clients’ cash in-house in favour of outsourcing. The firm keeps bank deposits in line with thresholds for Financial Services Compensation Scheme cover, with the remainder in cash equivalents.

How are cash managers performing?

Wealth advisory firm jonathanfry launched its Dynamic Cash Management service in February of last year. It is offering clients a return of 3% to 4% per annum AER net of fees through a mixture of instant access and short-term saving accounts and moves cash between accounts to get higher rates. The firm charges a 0.3% fee for the service with any commission received reinvested, said private wealth director Jonathan Fry, a former cover star.

Since launch, the service has amassed more than £60 million and has a minimum investment of £100,000.

‘This is a totally open market solution. I don’t think anyone’s solution is as good as what we are doing. A lot of the others just work with a captive group of institutions which pay commission,’ Fry said.

He said the firm was able to achieve higher returns than others, particularly those around the 0.7% to 0.8% mark because it invests in retail rather than institutional accounts. The team constantly monitors and ranks institutions depending on their view on financial strength and the client’s attitude to risk.