Wealth management can seem intimidating and complex, but generally it’s not. For the vast majority of individuals and households quality financial decision making starts with attention and discipline, not stochastic optimization or principal component analysis. Those tools are great, but they can be automated and applied at scale – they’re not important for individuals to focus on. Instead, great financial planning starts with paying attention to the little things.
One of those little things that seems to escape many savers and investors is the lost return from holding too much cash in wealth management deposit accounts earning less than 1% when typical money market funds are yielding more than 4.5% (in the Fall of 2023).
The thought process is simple and easy to model. Within three minutes, a household with $100,000 balance in a liquidity reserve can add $4,000 per year to their wealth. The three minutes is about how long it takes to log in to your account or contact your wealth manager to make sure your cash is sorted appropriately. The $4,000 is the benefit of moving from a 0.5% yielding deposit account to a 4.5% insured money market account.
This cash sorting should be automated. Deposit accounts are critical to managing transactional cash, but they’re inadequate for many other cash purposes. Automatically moving cash from money market funds to deposit accounts for transactional purposes is available many places – but is generally not the default offering at the largest wealth management affiliated banks. This lack of automation is an example of “information arbitrage” where big financial institutions use a little friction to earn excess revenue because of a client’s lack of awareness. A little attention is all it takes to offset this arbitrage.
So, this week’s Two Minute Tuesday is super simple – and potentially super valuable (a 20 year future value of $4,000 compounded at 3% interest is over $100,000). Don’t forget to sort your cash.
Important Disclosures & Definitions
AAI000408 09/12/2024
