For a variety of reasons high net worth families often need to keep levels of cash above FDIC limits that they might have for their account. Currently FDIC insurance is $250,000/insured bank/institution for each ownership category. For a family with $2 Million or more in cash, this might mean their assets are not covered by FDIC insurance. Something many depositors recently realized and thus in turn contributing to Silicon Valley Bank’s collapse.
In the last decade or so the interest earned on cash was negligible, so the main concerns around cash management focused on security or FDIC insurance.
The latest experience with banks in our backyard here in Silicon Valley has redirected attention to cash management needs. Silicon Valley Bank’s collapse and First Republic deposit concerns has reminded many of the potential risks associated with cash in banks.
Up until last year interest on cash was negligible, but now one can earn more interest and still have FDIC insurance. High net worth families can accomplish this a few different ways:
1. Buying short term CD’s through a brokerage. This can be appealing for a few different reasons:
A. Potential Access to Funds before Maturity: When buying a CD at a bank, almost always one must hold the CD maturity without any other options. When buying a CD at a brokerage, one usually has the option to sell a CD before maturity if one needs to do so. There is a risk that selling might mean selling below the value that one would receive at maturity, but still one at least has a potential option to access funds prior to maturity.
B. Possible FDIC insurance on funds above what one could get in one bank: FDIC insurance is based on depositor, institution, and ownership category. One can open up numerous bank accounts to get access to different institutions, but this can be cumbersome to manage. Buying CD’s from different institutions through a brokerage account can get access to insured banks and FDIC insurance by owning CD’s issued by different institutions, but also the simplicity of holding assets in just one account.
C. Amazing Rates Often secondary CD’s are available to buy, and sometimes the rates on such CD’s are higher than one can find anywhere else.
2. Holding Funds in Different Categories. Since FDIC insurance is based on a number factors including how an account is titled, it is possible for an individual to gain more coverage than holding assets only in their name. For example a couple with a trust could potentially get $1Million or more in coverage by holding $250,000 in the name of one of them, $250,000 in the name of another, and $500,000 in the name of a trust which has each of them as beneficiaries. Scroll down to Example #7 to see other ways this might work.
3. Using a Cash Management Ap. This aims to ensure you have FDIC coverage and move funds around to help you obtain a higher yield by always looking for a higher rate. There is a small cost associated with this service, but in theory you should be able to make up for that if your status quo is leaving your cash in one account on a regular basis. You should also be aware that you have to give a third party access to your accounts.