Cash That Comes With a Guarantee

(Dow Jones) With the markets showing little direction of late, financial advisors may find themselves wanting to put more of their clients' money in cash.

But at a time when yields are low on such once-standard options as money market funds and U.S. Treasuries and demand is high for a federally guaranteed product, it becomes a question of where to turn. Especially if the client has more to bank than the $250,000 insured maximum set by the Federal Deposit Insurance Corp. for individual accounts.

Fortunately, there remains a solid-and increasingly popular-choice: deposit programs that spread money among several banks, thereby offering security and convenience.

Pershing, a leading custodian for broker-dealers and Registered Investment Advisers, provides such cash account options for clients of its adviser network through Dreyfus, Deutsche Bank and Liquid Insured Deposits. [The options are available outside the Pershing platform as well.] The Certificate of Deposit Accounts Registry Service offers its program through a network of more than 3,000 financial institutions. And USA Mutuals has an Insured Cash Shelter Account that's also marketed in part through advisers.

These cash-management solutions became hot during the financial meltdown of 2008-09, when keeping money safe became a critical concern. Customers are not getting much in the way of returns: Depending on the firm that's offering the product and the terms--some accounts are liquid, some aren't--rates can be as low as 0.01 to 0.25 percent.

Still, the appeal hasn't declined. In fact, it may have grown because of the recent market volatility.

"What we're seeing is a move toward safety and simplicity," says John N. Drahzal, president of Liquid Insured Deposits, which offers up to $2.5 million in FDIC protection on its accounts. The company's total deposits have nearly doubled to more than $8 billion over the last two years. "It's increasing almost daily," Drahzal says.

Some options offer even higher limits--up to $10 million in the case of the Insured Cash Shelter Account [which has a slightly higher current return of 0.34 percent]. With the Certificate of Deposit Accounts Registry Service, it's apparently limitless.

"We used to advertise a $50 million [FDIC] limit, but we don't do that anymore," says CDARS spokesman Phil Battey. [The company doesn't have many customers looking to push the $50 million ceiling. On average, most are depositing $1 million.]

In many instances, the customers aren't fleeing the markets but instead have suddenly come into a large amount of cash--say, through an inheritance or sale of business--and don't want to be rushed into making a decision about what to do with it. Previously, they might have felt confident enough to go with a money market fund as an interim solution, but now they like the insured option.

For advisers, who often charge little to no fee for managing a portion of a client account with such a small yield, it's a better deal if the client decides to go into the market. In the long run, it may be better for the client, too: A sluggish market can also represent a buying opportunity.

The decision to go to cash--even an insured cash product--shouldn't be made in panic or fear, says Joe Jennings, investment director for PNC Wealth Management in Baltimore. But it might make sense if the client sees it as part of a broader asset allocation strategy or has a large purchase, such as a home, in mind.

"The first order of importance is to understand what the client is trying to accomplish," says Jennings.