For the first time in a long time, you can get a decent return on a savings account or Certificate of Deposit (or CD). But beware of banking products, even those that have adjusted to the yield environment we’re living in. We’ve seen banks play games with their customers. Fortunately, there are various “Cash Alternatives” with similar or higher yields that don’t have the same drawbacks (and may have significant advantages). We use a mix of these to build our clients segregated, diversified Cash Alternatives portfolios to replace part of their cash reserves in the bank—and we can do the same for you.
The Problems with Banks
Here are a couple of examples of how poorly some banks are acting:
- If interest rates rise after you open a savings account, you may have to go through the hassle of opening a new account at the same institution to get the higher rate. But banks will certainly drop their savings account yields ASAP as soon as rates fall!
- You may be able to get an even higher yield with a CD (though these come with lock-up periods). But then we’ve seen banks automatically reinvest their clients’ maturing CDs into ones paying a much lower rate than the going rate, even on the bank’s own CDs offered to new clients. I guess they thought the clients wouldn’t notice?!
Plus, interest income from standard savings accounts and CDs will be taxed at your (usually higher) ordinary income tax rate.
What Are the Alternatives to Your Savings Account or CD?
Here is what the Cash Alternative landscape looks like today compared to banking products (from a return and risk perspective):
- Many Cash Alternative options sport higher yields, some of which float automatically with prevailing rates (avoiding the aforementioned reinvestment issues with savings accounts and CDs).
- Government bond fund options invest solely in securities backed by the full faith and credit of the US government, so you don’t lose all government protection (the government has promised to make all interest payments and redeem the bonds at maturity, though there can be price volatility, however low, along the way).
- Most if not all income from Treasury bond funds is not taxed at the state level (so for investors residing in a state with an income tax, these alternatives’ after-tax return may be even more attractive).
- Some Cash Alternatives may offer capital appreciation potential in addition to their yields.
- With most securities, there is no lock-up period or liquidation penalty as with CDs. You can sell whenever you need the money and have it transferred to your bank account within two days after the transaction date.
Consider Professional Cash Management
Did you know that many wealth managers, including Hesperian Wealth, offer cash management accounts? They are sometimes offered at a lower fee than what’s charged on regular investment assets.
At Hesperian, we don’t charge on the first $50,000 in portfolio assets no matter what, so most clients can outsource the management of a portion of their cash reserves to us for free. We’d then manage it in a segregated, diversified brokerage account under a separate ultra-conservative Cash Alternative investment mandate.
The Hesperian Approach
The art is really in constructing a mix of Cash Alternatives with the goal of generating the highest after-tax total return possible for you personally, but with greater liquidity than income investments with lock-up periods. That’s where an investment advisor’s deep knowledge, research capabilities, and intensive due diligence come into play.
In our process, we take your tax bracket, state of residency, and our own tactical investment views into account. We’ll check whether other tax-advantaged options (such as municipal bonds) would be more appropriate given your tax situation. And if you’re an impact-oriented or values investor, we may have other Cash Alternative replacements for any funds with exposure to businesses you don’t want to be invested in.
Let’s get your cash working for you. Reach out today to learn more.
All content presented in this article is for informational purposes only. Materials presented should not be interpreted as a solicitation or offer to buy or sell a security or the rendering of personalized investment advice, which can only be provided through one-on-one communication with a financial advisor. The content reflects the opinions of Hesperian Wealth LLC (HW), which are subject to change at any time without notice. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All information or ideas provided should be discussed in detail with a financial, tax, or legal advisor prior to implementation.
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Note, HW earns its fee from some clients based on the assets under its management. This gives us an incentive to recommend investing in brokerage accounts (on which we do charge fees) versus bank accounts (on which we do not charge fees). This creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interests ahead of yours. Under this special rule’s provisions, we must:
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