Ask the Experts: Clients Anticipating High Interest Rates Ask About Cash

Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report

Should Older Clients Hold Cash to Benefit From Increased Rates and Avoid Risk of Bonds and Debt Instruments Losing Value?

Just ask any friend who’s in the market for a house – higher interest rates have arrived with a steep upwards trajectory. Bond markets and banks analyze every word from the Fed to discern the height and speed of interest rate increases.

Do peaked interest rates pique your interest?

In this atmosphere of rising rates, older clients approaching or in retirement may think back to days when investing in a CD or money markets returned solid, low-risk yields and ask advisors about the availability of dependable risk-adjusted returns.

By that same token, when your investment time horizon is short, the threat of an interest-rate induced bear market feels very real, especially for bond investors who chose debt investments for safety and reliable income.

Here’s the Question for Our Experts

This brings us to an anonymous query from one of our financial advisor readers:

“I have a question for Ask the Experts:  My older clients are increasingly asking about whether they should stay in cash accounts in anticipation of higher interest rates around the corner. How can I best approach these conversations?”

Introducing Our Expert Panel 

Issues at the intersection of a fast-changing interest rate environment, retirement planning and asset allocation require a unique blend of expertise.

That’s why for this Ask the Experts feature, we’re pleased to showcase guidance from the following industry leaders on this topic:

  • Zachary Parker, Senior Vice President of Retirement & Income Planning of Advisor Group, an independent network of wealth management firms with over 10,000 financial advisors and over $500 billion in assets
  • David Stone, CEO and Co-Founder of RetireOne, an independent platform for fee-based insurance solutions 
  • John Majors, FSA, CFA, AEP, Wealth Advisor at SageView Advisory Group, an independent RIA firm that offers comprehensive wealth management services as well as retirement plan consulting solutions
Zachary Parker, Senior Vice President of Retirement & Income Planning, Advisor Group

Zachary Parker, Senior Vice President of Retirement & Income Planning of Advisor Group

The answer depends on why your clients are in cash accounts. Are they in cash as a haven from a volatile equity market or concerned about interest rate risk in your fixed-income portfolio? Is the cash for the most appropriate need – short-term liquidity for assets they plan to spend in the next 36 months? If the cash is for the latter, it’s reasonable to continue maintaining a cash holding for spending needs.  

The advantage of keeping assets in cash accounts is that an increase in rates can impact a client’s interest earnings quickly. 

It’s a more challenging discussion if clients are holding cash because they fear losses from other investments. Identifying a client’s time horizon and goals will usually address where the client should invest the assets. 

Do all good things come to those who wait?

For example, if they are in cash because they are concerned about the inverse relationship between their account value and interest rates, you can provide some protection in the form of bond laddering. Using this method appropriately could provide for a return of a client’s principal over a specified period.  

Finally, if the client doesn’t want to take any interest rate risk, passing this risk to an insurance carrier through fixed annuities can provide a rate of return higher than the client would receive in cash accounts, while passing any interest rate risk to the annuity providers.  

Ultimately assuming rates will increase creates opportunity cost. The client is giving up earnings in their account they could be receiving today in order to benefit from potentially higher returns. If that wait is a year or longer, it’s harder to recover what the client missed out on by maintaining a cash position with a lower yield.

David Stone, CEO & Co-Founder, RetireOne

David Stone, CEO and Co-Founder of RetireOne

It’s important to understand the message inside of the question. Your clients may be worried about declining bond prices, or a market correction due to rising rates…or both.

There’s a great deal of uncertainty in the world today with the pandemic, and the specter of a potential global conflict. Staying in cash certainly keeps retirement assets safe from market risk in this environment, but it will expose them to inflation risk, which has been in sharp focus of late. 

A potential solution may be to protect their principal with a multi-year guaranteed annuity (MYGA), fixed index annuity (FIA) or registered index linked annuity (RILA). These solutions represent a spectrum of protection with upside potential. 

The secret to guaranteed earnings has been revealed!

MYGAs guarantee a fixed rate of return over a period with better rates than certificates of deposit. FIAs offer a floor of protection with capped market upside tied to an index like the S&P 500. RILAs also offer performance tied to an index but allow you to buffer against market losses.

Each provide varying degrees of potential reward that may ultimately help you keep clients confident and invested, which may offer a better chance at keeping pace with inflation. Pro tip: look at zero-commission advisory solutions.

John Majors, FSA, CFA, AEP, Wealth Advisor, SageView Advisory Group

John Majors, FSA, CFA, AEP, Wealth Advisor, SageView Advisory Group

The first thing I always recommend is to acknowledge a client’s questions and concerns, ask any qualifying questions and allow them to share additional thoughts and feelings. This slows the temptation to leap into an answer, demonstrates you are listening and allows you to deliver a more appropriate response.

Now it is time to assess the needs and timeframe for the cash accounts. If the need is for short-term living expenses or major purchases, or this cash is part of a minimum comfort level of cash desired by the client or recommended by you, the client and you may determine that staying in cash is most appropriate.  

Always listen with the intent to understand not only because you have to reply.

If instead this is extra “sidelines cash,” you can remind the client that the cash accounts are losing purchasing power when inflation is higher than the typical interest rates paid on cash –  currently the case to say the least. Since many older clients hold a more conservative asset allocation, suggesting an increase in their equity allocations to combat loss of purchasing power might fall flat.  

Despite that, it could be a good time to re-educate the client on how various asset classes (including equities) have performed over time versus cash. Beware though of throwing data at a client to answer what may ultimately be an emotional question.

From a specific recommendation perspective, now might be a good time to introduce Series-I Savings Bonds as an alternative to holding cash. These bonds provide the safety that your older clients desire with cash, while providing an interest rate tied to current inflation. As of April, the interest rate is 7.12%, and it resets each May and November. 

An individual can buy up to $10,000 in I-bonds per calendar year. There are holding period and other factors to consider, so you and your client will want to research this or any other strategy before implementing.

Ultimately, the answer to this or any allocation question should be answered in the context of a client’s overall financial objectives and goals. Therefore, a financial plan should be the guide that helps you and a client mutually determine the best path forward when analyzing any financial decision. 

With everything in life, there needs to be some balance. That’s why it is important to have continuing conversations with all your clients to find the balance between meeting their goals while also giving them peace of mind.

Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at

Related Posts

Sign Up for Our Newsletters

Sign Up for Our Newsletters