Tag Archives: Financial Advisor

A Silver Lining Within Today’s Interest Rate Environment

A Comparison Between Cash Management Products

By Robert Eifert, CFP®

In light of recent events such as the Silicon Valley Bank collapse, many individuals have questions about cash management strategies. As the Federal Reserve has been on a campaign to raise interest rates to combat inflation, the cost to borrow has increased significantly, and the broader markets are exhibiting volatility while investors attempt to interpret what’s next for the economy. On the other side of the coin, rates in short-term cash-like instruments have begun to rise to reflect the current rate environment.

In the midst of a tortuous market cycle, the ears of many investors and financial professionals tend to perk up when they hear there are ways to earn a 3%-5%1 return while taking on very little (or, in some cases, zero) risk.

While the exact path and duration of the Fed’s current monetary policy may be uncertain, we at Cahaba Wealth avoid altering our strategy based on short term predictions or pontifications. We choose to focus on the opportunity to take advantage of these high yielding and highly liquid products when it makes sense for clients.

Every decision we make for client portfolios is based on a comprehensive financial plan and the 3 pillars of investment management:

  • Risk tolerance
  • Time horizon
  • Cash flow needs

Below, we will compare and contrast a few methods of managing cash for clients who have excess savings. An important distinction to make is that the savings vehicles we are comparing here are only one small component of a well-diversified portfolio that is aligned with goals and risk tolerance. Depending on your unique situation, the following vehicles could be preferable to traditional checking accounts that are currently paying little to no interest 1.

High Yield Savings Accounts:

These are traditional deposit accounts at various banking institutions that compete for the highest rate and most account flexibility. There may be limitations on the amount of transfers in or out of these account in any given month, but this still affords very quick access to a linked checking account for any expenditures. As these accounts are offered by banking institutions, depositors receive full FDIC insurance (up to the limit of $250k per account holder). Because of the safety and flexibility of these accounts, rates are generally lower than other products available.

Certificate of Deposit (Brokered):

A CD is a banking product that offers a fixed rate of interest in exchange for holding a deposit with that bank for a pre-determined time period. For our purposes, we will focus on the higher yielding “brokered” CDs that banks offer to depositors through larger brokerage houses like Fidelity, Schwab, Vanguard, etc. These are still bank products and are insured up to the FDIC limit.

The rate on a brokered CD is generally higher than a savings account because purchasers are agreeing to leave their deposits with the bank for anywhere from a few months to a number of years. This can be beneficial because the rate is locked up for that period, despite any interest rate fluctuations.

A brokered CD actually has a secondary trading market where one can sell before the end of the term if funds are needed (CDs obtained directly from a bank lack this feature and charge penalties to do so). The price of these CDs is highly dependent on prevailing interest rates and a number of other factors, so there is still a risk that the purchaser could receive less than the actual value that would be achieved if held to maturity.

Treasury Bills:

A T-Bill is U.S. Government debt that matures in a period of one year or less. These securities are typically sold at a “discount to par value”. This essentially means that the purchase price is less than the stated “par value”, and upon maturity the purchaser is paid that par value. The difference between purchase price and par value represents interest earned (in order to compare with other interest-bearing instruments).

T-Bills are regarded as one of the safest assets in existence, as they are backed by the unlimited taxing authority and borrowing power of the U.S. Government.

As of late, T-bills and Brokered CDs of similar maturities have been trading rank for the highest interest rate1. However, T-bills have the advantage when it comes to liquidity. The secondary market for treasury instruments is very robust which means that they are very easy to liquidate before maturity, should the need arise.

An additional benefit of Treasury instruments is that they are generally exempt from state and local income tax. This can result in significant savings depending on one’s tax situation and the amount invested. 

Money Market Mutual Funds:

These Mutual Funds consist of a mix of very safe, short term assets from the U.S. Government, banks, and high quality corporate issuers. There is a wide offering of Money Market Funds that allow investors to tailor their exposure to various instruments based on desired yield, risk and tax treatment. The rates earned with these funds are variable, but we’ve found that they can be competitive with the other instruments listed even after the fund management fees are considered.

A distinct benefit of a money market fund is the ability to liquidate all or a portion of the investment at the $1.00 “per share” value that the funds maintain. This allows investors to earn and re-invest the interest, all while preserving the ability to utilize the cash in short order.

These products each have different use cases, and are no substitute for a diversified portfolio that is aligned with investment objectives. The financial planning process is a critical piece needed in order to effectively manage a liquidity portfolio. Armed with the knowledge of our clients’ short and intermediate term liquidity needs, we can align our clients’ hard earned savings in the appropriate vehicles. If you have questions regarding your specific situation, please do not hesitate to reach out.

Robert Eifert, CFP®, is an associate advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

1 Based on interest rate environment as of March, 2023.

Source: “Fidelity Money Market Funds.” Money Market Funds | Fidelity Institutional, Fidelity Institutional Asset Management®, 19 July 2022, https://institutional.fidelity.com

Source: Kozlowski, Julian, and Samuel Jordan-Wood. “Where Do You Keep Your Liquid Wealth-Bank Deposits or T-Bills?” Economic Research – Federal Reserve Bank of St. Louis, 16 Dec. 2022, https://research.stlouisfed.org

Source: Leondis, Alexis. “CDS versus T-Bills: For High-Yield Savings, Go with Treasuries.” Bloomberg.com, Bloomberg, https://www.bloomberg.com

Source: “Maintaining the Stable Net Asset Value Feature of Money Market Funds.” GFOA.org, Government Finance Officers Association, https://www.gfoa.org

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Courage

By William Jackson, CFP®

When discussing successful wealth management, most will typically include investment management/asset allocation, cash management, risk management, and other predictable factors. What is typically omitted or minimized relates to behavioral psychology.  How one reacts to adversity is arguably more impactful to long-term success than all the other factors combined.  Specifically, having the courage to stay the course during uncertain times is often the greatest determinant of long term success.

Holistic financial planning permits a good advisor to focus every conversation on the client’s long term plan.  This approach enables the advisor to provide a service that truly helps clients lead their lives with greater financial clarity.  The challenge is that we work in an industry that is intentionally opaque.  Having a plan and staying the course is not standard operating procedure for the majority of industry participants.  These firms have a strategy of offering reactionary products to clients that attempt to solve the problem of the day.  They bombard our inboxes with updates to make us aware of solution “de jour”.  Frequently, these products are of a complex nature, and render the buyer feeling underqualified to understand but worried about missing out.  These firms are well aware that when clients are overwhelmed with “over their head” concepts, they might feel hesitant to ask questions. This ultimately results in many clients agreeing to purchase products that are often unnecessary or even inappropriate for their personal plans.  A good advisor who is “fee-only” and focused on financial planning serves as an agent of clarity with the mission of helping clients understand why any products chosen for them are beneficial and necessary.  This might sound simplistic, but the rewards are real.

The foundation of Cahaba Wealth was built on knowing our clients and their financial goals.  We provide comprehensive financial planning in a way that leads clients to have greater understanding of their financial lives.  The financial plan dictates the investment plan. The investment plan and process are intentionally designed to encourage a discipline that has shown to be beneficial to long term wealth creation.  In asking you to trust in the process and have the courage to take a road less traveled, we are demonstrating our commitment to your success. We are aware of the magnitude of this request and are grateful for the faith shown.

Eleanor Roosevelt wrote, “You gain strength, courage and confidence by every experience in which you really stop to look fear in the face. You are able to say to yourself, ‘I have lived through this horror. I can take the next thing that comes along.’ You must do the thing you think you cannot do.”

We are proud to call you clients and thankful for the opportunity to serve.

Bear Market Playbook – Control the Controllables

By Chris Conkell, CFP®

The first half of 2022 has been painful for investors. The laundry list of worries continues to mount as we stumble through the aftermath of a global pandemic. This year’s sleepless nights are brought to you by the highest inflation rate in forty years, a war in Europe, spiking interest rates, a bear market in stocks, and rapidly declining consumer sentiment.  

You would not be human if you didn’t experience some degree of fear at the direction of current events. As trusted guides, our mission is to help clients look past temporary headlines and maintain a relentless focus on long term planning. This largely boils down to controlling the controllables – what follows is a list of actionable steps you can take to ride out the storm:

  1. Choose to Play Long-Term Games

Rather than succumb to fear and emotion, understand that bear markets and recessions are part of every investor’s lifecycle. View them as necessary speed bumps on the road to capturing long term returns that will fund future lifestyle needs, dreams, and objectives. Ben Carlson writes in his book, A Wealth of Common Sense:

“Over decade-long time horizons, your investment performance will mainly be derived from how you handle corrections, bear markets, and market crashes. During every single bear market there will be times when you wonder if the losses will ever stop. You will always wonder how much lower the market can go. The economic news will be terrible. Other investors around you will be depressed. Pessimism becomes pervasive.”

Not getting scared out of your portfolio is half the battle, and our directive is to help clients stick to their financial plan.

  1. Keep Buying

Bear markets provide an opportunity to buy stocks at lower prices. This includes workers making regular payroll contributions to retirement plans, investors with excess cash to deploy, and even retirees who can opportunistically rebalance their portfolios. While it’s impossible to know how long it will take for markets to recover, a review of the historical record offers a dose of optimism. Below is a look at broad-market U.S. stock returns following steep market declines since 1926:

Source: Dimensional Fund Advisors. Past performance is no guarantee of future results.

  1. Harvest Your Losses

Given the decline in both stocks and bonds this year, some investors might have unrealized losses in portions of their non-retirement portfolios. By strategically selling these investments and replacing them with highly correlated alternatives, you can book losses to offset tax liabilities (while maintaining your target asset allocation). As the saying goes, when life gives you lemons…

  1. Consider a Roth IRA Conversion

Although caveats abound within this complex planning technique, generally speaking, the cost of Roth conversions are discounted during market declines. To recap, Roth IRAs offer tax-free appreciation and withdrawals, and unlike traditional IRAs, required minimum distributions are not mandated when account owners turn 72. Roth conversions executed in bear markets are especially enticing, as future gains will be tax-free when the market rebounds. Given the complexity and reliance on your current tax bracket, we strongly recommend discussing the merits of this strategy with your financial planner.  

  1. Plan!

There are many aspects of a comprehensive financial plan that can be addressed away from the high stress theater of the 24/7 financial news cycle. Several suggestions include:

  • Review your estate plan and beneficiary designations to ensure your wishes are reflected appropriately.
  • Confirm insurance coverage amounts are sufficient for life, disability, property and casualty, etc. For example, home values have increased significantly of late, so make sure your replacement coverage is accurately reflected.
  • Review household budget/lifestyle to accurately gauge personal inflation rate. 

Although successful investing during bear markets will largely be defined by what you choose to ignore, there are plenty of actionable steps you can take to meaningfully improve your financial household. We’re here to talk about your plan, and appreciate the opportunity to be of service!

Chris Conkell, CFP®, is a financial advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.