“Every advisor in the world is getting calls about this,” says Stephan Cassaday, CEO of Virginia-based Cassaday & Company, a wealth management firm with $4.6 billion under management. “I guarantee a lot of people are looking at moving money around that is above $250,000.”
Cassaday and the 12 other advisors affiliated with his firm are frontline soldiers in the latest crisis to hit financial services. The shock of the second and third-largest bank failures in U.S. history, coming just two days apart, has wealth management advisors working overtime to assure clients their assets won’t be threatened by future bank casualties.
While no one believes this crisis is anywhere near as bad as 2008, what makes this particularly difficult for brokers is that clients’ current fears have little to do with speculative investments, but rather are centered around institutions long considered to be safe, including banks like $213 billion-in-assets First Republic, which itself has more than 375 private wealth managers.
On Sunday, the Federal Reserve, FDIC and Treasury Department announced all depositors would be made whole at the two failed institutions–$209 billion-in-assets Silicon Valley Bank and $110-billion-in-assets Signature Bank—and many depositors have already regained access to their funds. But some advisors and their clients are concerned because the Feds did not explicitly guarantee deposits above $250,000 at banks other than these, points out Michael Crook, chief investment officer at Mill Creek Capital Advisors. Depositors at smaller banks in particular could be at risk because the federal government provided this extraordinary relief on the basis that the failure of the two banks presented a “systemic” risk.
Clients are either moving uninsured money out of the banks or spreading deposits out across different accounts, according to Laila Pence, president of Newport Beach, California’s Pence Wealth Management. One way clients can ensure that more than $250,000 is covered at a single institution is to diversify the types of accounts a client has. For example, a client could have a personal savings account insured up to $250,000, as well as a joint account with her spouse of $500,000 and another IRA at the same bank (invested in bank CDs) amounting to $250,000. Every penny of that million dollars would be insured by the FDIC. Thus, many advisors at big firms are now diversifying their client accounts, while at the same time trying to keep assets under one roof.
Another alternative for individuals is to use a brokerage like Fidelity which offers an FDIC Insured Deposit Sweep program that will spread your idle cash among more than two dozen banks to maximize your federal insurance coverage. The current annual yield is 2.34%, and banks on its distribution list include New York Community Bank, Fifth Third Bank, Wells Fargo and Bank of Oklahoma. Notably, Fidelity lists First Republic Bank and Pacific Western Bank, two previously acceptable banks whose stocks have recently plummeted over bank-run concerns, as unavailable for its deposit sweeps.
Amid the uncertainty of the last few days, many of the big banks and wirehouses have seen billions of new dollars coming in from small and regional banks as people seek what they perceive to be safer places to keep their money. When Forbes contacted banks including UBS, Wells Fargo, JPMorgan Chase and Bank of America Merrill Lynch, all declined to comment.
For small businesses, keeping high balances at one institution can be beneficial, in terms of added services–a key explanation about why so many start-ups were keeping all their funds at SVB. “I believe that if I didn’t keep all of my funds at my bank,” says one New York City entrepreneur with account balances above $250,000, “my banker would have not been so eager to help me apply for PPP during Covid.” (PPP, of course, was the federal program of forgivable loans designed to encourage businesses to keep workers employed. In the early days of the program, there were widespread complaints that banks were processing their best customers’ applications first, before the money ran out. Eventually, Congress added more money to the PPP pot.)
Still, many affluent clients already keep accounts at multiple financial institutions, observes Louis Diamond, president of Diamond Consultants, a New Jersey-based firm that works with advisors. While some people are newly worried about deposits in excess of $250,000 and could move money to other institutions, he considers that something of “knee-jerk reaction” to the negative headlines. Morningstar analyst Eric Compton agrees, pointing out that most wealth assets are not bank deposits, and therefore aren’t insured by the FDIC and not subject to similar bank-run risks.
One healthy byproduct of the Silicon Valley Bank crisis is that it has sounded a wake-up alarm for those clients that have been earning minimal yields on their idle cash, despite the Federal Reserve’s aggressive rate increases. Money market funds and Treasuries bills which are yielding 4% or more have continued to see billions in fund flows over recent weeks. So far this year, money-market funds have seen total inflows of $96.8 billion—the largest amount during that period since 2008, while short-term Treasury bond funds raked in roughly $10 billion in February, according to Refinitiv data.
This trend is likely to continue and get extra fuel from the ongoing fears rippling through the banking system, says Alex Shahidi, managing partner at $24 billion Los-Angeles based firm Evoke Advisors. “The spread is so big that this discrepancy is going to exist for a while.”
“People are realizing that there is no compensation for the risk you take with uninsured deposits,” says Avy Stein, co-founder of Cresset Capital, a family office and private wealth management firm based in Chicago. “Advisors should be moving clients’ excess cash either into diversified accounts, government money market obligations or brokerage accounts.”
“Every advisor should be thinking about where they have client assets in custody—what risks are there and how secure is that cash?” says Rob Sechan, CEO of NewEdge Wealth, which has $32 billion in assets under management.
While most advisors are simply scrambling to reassure and help nervous clients, the 50 plus financial advisors working for SVB’s sister wealth management firm, SVB Private, are also scrambling to salvage their own careers. SVB Private, which manages some $15 billion in assets for high net worth clients and was known as Boston Private before it was acquired for roughly $1 billion in January 2021, is owned by the holding company for the bank, SVB Financial Group. Several potential buyers, including JPMorgan, are reportedly considering a bid for the holding company’s nonbank assets, but the fate of SVB Private remains up in the air.
But few advisors at SVB Private are likely to stick around to find out how that turns out.
According to industry insiders, many SVB Private advisors are now being courted by rival firms and a handful based in New York have already joined NYC’s Cerity Partners, which has $45 billion in assets under management. Cerity declined to comment when contacted by Forbes.
“[SVB] Advisors are getting ready to exit en masse,” says Patrick Dwyer, managing director at NewEdge Wealth, who was formerly a managing director at Silicon Valley Bank for over two years. “By Friday we’re likely going to see that the majority of these people have made a decision.” Dwyer predicts that most advisors will likely not want to wait around to see if there is a potential acquisition: “Most people will use this as an opportunity to leave because the brand damage was pretty big.”
What’s more, it should be fairly easy for SVB Private advisors who do try to leave to take client assets with them, Dwyer points out, since the majority of those assets are custodied at places like Fidelity and Schwab.
“There needs to be someone big and respected in the industry to bail them out, otherwise they are likely to jump ship,” says Pence, the Newport Beach wealth manager.
