Uncertainty about an imminent stock market plunge can make for jittery investors—and a desire for assets that can be tapped more easily.
Americans appear to want more liquidity and less money in funds that don't allow immediate access to assets. Recent surveys showed that the number of people who own taxable accounts is up even as consumers lock less of their money in such illiquid accounts as employer-sponsored retirement plans.
“In general, folks ... want to stay away from the heart-dropping late 2000’s, when many saw their wealth evaporate,” said Gail Kinsella, a CPA and partner with the Bonadio Group in Syracuse, N.Y.
More consumers are starting to recognize “the tension between tax deferral and [money] accessibility, and they are balancing liquidity choices on a spectrum of checking/savings, taxable brokerage and goal-specific savings accounts,” according to a recent Hearts & Wallets study. Ownership of bank checking, saving and certificate of deposit accounts are up, while money in employer-sponsored retirement plans has held steady, according to the study.
Accessible emergency funds continue to be a priority among consumers; investment/vacation real estate and contributions to 529 education-savings plans are also on the rise, according to the study.
Does this apply to your wealthy client? Though wealth generally means a client can afford to lock up more money for longer periods (and not tap it for such expenses as child-raising, first homes or education), the latest CNBC Millionaire Survey found more millionaires claiming that their short-term investments are increasing and that they are unwilling to commit more to the stock market in the near future.
Rising interest rates are also making money markets and similar accounts more attractive, at least marginally.
“High-net-worth investors are concerned about the risks of a potential market correction, but not overly concerned about an imminent one,” noted Randy Siller, a CPA, partner and co-founder of the family wealth advisory firm Siller & Cohen in Rye Brook, N.Y. “Most don’t want to feel full equity market swings like those difficult years, but also know that to make money over the long term they need to continue to have some exposure to those markets. Investing some of the portfolios in liquid hedging strategies as well as in bond ladders helps to weather those storms.”
Long-term liquidity’s tax cost can be expensive for the average saver—and even costlier for HNW clients—who are socking away for retirement, for example. According to TurboTax, an annual deductible saving of $5,000 for 20 years in an illiquid investment account grows $100,000 in contributions to $247,000. The same investment in a taxable, liquid account would grow to only about $194,000 for those in the 25 percent federal tax bracket, and less if the saver lives in a state with a state income tax.
Yet fear of taxes can prevent some HNW clients from converting long-held assets to cash, to the clients’ detriment. Lawrence Pon, a CPA in Redwood City, Calif., recalled how one client secured a robust portfolio of well-known large-value stocks and U.S. Treasury bonds in a divorce decades ago and refused to sell them to avoid paying capital gains tax.
“Between the dividends she got from the stocks and the interest she got from her Treasurys, she had more than enough money to spend, so she refused to touch her portfolio,” Pon said. “She also refused to have any of her money managed.” Both sets of holdings, he added, have plunged in value since.