Our firm is committed to looking for ways to add value to client relationships. The intention of this blog is to draw attention to one of the little details in our implementation that adds value, by effectively managing the cash targets within client portfolios. Most clients do not need to allocate funds to cash (other than for emergency reserves), especially if they are currently in their working years and are making deposits into their investments. Even during retirement, a portfolio generates dividends, interest and capital gains, often sufficient to meet a large portion of the cash need. So, when we see new clients come to us who have cash targets, sometimes as high as 10-20% of the portfolio, we have had to ask ourselves why this occurs.
We believe these large cash targets are typically not for the benefit of the client, but instead is a benefit to their investment advisor. As you can imagine, to keep track of cash needs for a large set of clients can become a daunting task, especially as withdrawals and contributions are made on a regular basis. Also, when portfolios are rebalanced, with these moving targets, including market volatility in any given day, the dollar amounts of sales and purchases must be closely managed. Sometimes, the result that a trade error occurs which would cost the advisor to make the client whole. The simple solution is for the advisor to always maintain a large amount in cash to cover these and other unforeseen circumstances. The problem with this simple approach is having unproductive funds that could otherwise be working in the portfolio to generate returns for the client. For example, a portfolio with a value of $1 million, with a 5% weighting to cash, will result in $50,000 earning a sub-par return. However, if that same cash position were to earn 8% by being fully invested, that would generate an additional $4,000 a year.
At Total Wealth Planning, we manage these and many other details to ensure we can deliver added value to each client. We have invested heavily in our people, process and technology to allow cash targets to be kept to a minimum. The end result and goal is to see client portfolios working as hard as they can. If you would like to learn more about this or other ways we successfully add value to our clients, please feel free to contact us for a complimentary, no-obligation meeting by emailing us at firstname.lastname@example.org or by calling our office at 513-984-6696.