Wealthy investors and family offices are reallocating their funds out of bank cash balances and into short-term instruments, such as treasuries and money markets, as a result of the recent Silicon Valley Bank crisis and concerns over the safety of bank accounts, according to a report by CNBC.
Wake-up Call for Wealthy Individuals
Michael Zeuner, the managing partner at WE Family Offices, which advises wealthy investors and family offices, shared with CNBC that many clients are asking questions about the deployment of their cash, specifically whether their money is on the balance sheet of the bank, something they have not previously considered.
Similarly, Patrick Dwyer, managing director at NewEdge Wealth, adds that the recent crisis has been a wake-up call for high-net-worth individuals who have cash reserves.
This crisis has accelerated a broader trend amongst wealthy investors to move cash out of bank balances and into higher-yielding, cash-like investments such as Treasuries and money markets, which often offer a risk-free return of 4% or 5% compared to a lower yield on savings or checking accounts.
Hence, wealthy investors and family offices are moving most of their cash balances into higher-yielding investments that are typically not on the balance sheet of the banks.
Simultaneously, some huge investors are withdrawing money from stocks and other investments due to concerns over rising rates and a potential recession.
Zeuner states that historically, cash was not an attractive investment, but in the last year, it has become an essential part of the portfolio due to rising interest rates and recession fears.
Investors who are concerned about the safety of their cash deposits in banks are being advised by Zeuner to ask their banks or advisors two basic questions. The first question is how their cash is being deployed, and the second is whether their cash is on the bank balance sheet.
If their cash is invested in Treasuries and other financial instruments, then it is less likely to be on the bank balance sheet and therefore less at risk in the instance of a bank run.
Zeuner explains that the key concern for investors is whether they have access to their funds if something happens to the bank. To mitigate the risks of losing their cash deposits in a bank run, some investors have been moving their funds to custodial accounts at brokerage firms and firms like Fidelity and Pershing.
These accounts provide similar benefits to a bank account, such as allowing wire transfers, check writing, and bill pay. However, these accounts are perceived as less risky and more portable.
Greater Sense of Comfort
Dwyer of NewEdge Wealth reported that many of their clients had moved their assets to Fidelity, which is not a bank and hence offered a greater sense of comfort. Wealthy investors and family offices will still rely on banks for loans and mortgages.
However, the strategy of banks requiring wealthy clients to provide deposits or primary-banking relationships in exchange for loans may be ending, according to advisers.
Dwyer further elaborates that clients understand that they can obtain well-priced loans from multiple banks and do not have to put their cash deposits at risk. This is because there are over 4,000 banks in the United States, and they can always find a bank that is willing to lend them money when needed.
Hence, wealthy investors are becoming more cautious and looking for alternatives to safeguard their cash deposits, while still maintaining their banking relationships for other financial services.
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