Cash is king
Helen Vieira, TEP, on why the ECB rate cut means a change in attitude may be needed when
optimising cash returns among private client practitioners and trustees.
The recent decision by the European Central Bank (ECB) to lower interest rates to
3.75 per cent is likely to be welcomed by most, both as an indication that inflation
is slowing to a more manageable pace and that economic growth is firmly back
on top of the agenda in the Eurozone. However, for private client practitioners and
trustees operating with euro-denominated clients and corporate structures, it may
well lead to practical challenges, particularly when it comes to managing cash
deposits and executing fiduciary duties for their clients.
Growing confidence
The ECB was among the first G7 economies to make a rate cut and the move suggests a significant
turn in the financial landscape.[1] Growing confidence that the cost-of-living inflation spike is behind
those in the Eurozone increases the likelihood that other major economies will follow suit. That
necessitates a re-evaluation of strategies when it comes to optimising returns on client’s cash
deposits.
This period of relatively healthy rates available on cash deposits over the past two years has not been
the norm. Since June 2014, ECB rates have swung from lows of -0.1 per cent to a peak of 4 per cent as
of September 2023, before dropping to 3.75 per cent in June 2024. Indeed, the climb above 0 per cent
only began in September 2022.
For most of the past decade, expectations for optimising returns on cash may well have dampened as
rates stayed ultra-low. Given the current economic conditions, it is unlikely that rates will be fall to 0
per cent again any time soon. However, it does seem increasingly certain they are going to be
trending downward again in Europe and across other G7 economies. Therefore, the onus will be on
trustees to keep cash returns healthy in an increasingly challenging environment where client’s
expectations of optimised returns have increased. Now, more than ever, practitioners need to embed
cash reviews deeply into their management processes and align them with their fiduciary duties as
part of that strategy.
Banking on cash
Traditionally, trustees and private client practitioners have treated cash differently from other assets
due to its relatively low risk and the broadly low interest rate environment. Investment portfolios
undergo rigorous and regular reviews as standard. However, cash holdings can tend to be overlooked.
Cash can no longer be sidelined in this way. As we enter a climate of decreasing interest rates, it is
crucial to integrate cash management into regular fiduciary reviews. This integration ensures that
trustees not only fulfil their duty of care but also optimise the asset class to work harder for their
clients.
This approach is critical to safeguard the interests of beneficiaries and meet the stringent
requirements of fiduciary responsibility. Trusts, particularly in Europe (although including ones
managed offshore), can contain considerable sums of idle cash that could be leveraged more
effectively. It is important to remember this is a fundamental fiduciary responsibility of trustees. As fiduciary
duties necessitate strict adherence to trust terms, prioritising beneficiary interests and maintaining
loyalty without conflict, duty of care demands the prudent management of trust assets. This not only
includes the preservation and repair of such assets but also the ensuring of adequate insurance and
sensible investment based on sound advice.
Considering liquidity needs is a crucial part of this. Trustees should maintain reasonable cash reserves
to address any immediate obligations or unforeseen contingencies. This prudent management
approach is echoed across European jurisdictions. Relevant legislation across the Eurozone shows
clear expectations that fiduciaries should invest wisely to preserve asset values, while also ensuring
they hold sufficient liquidity to fulfil obligations to beneficiaries.
The guidelines and best practices across these countries underscore a common theme: the prudent
management of liquidity is not just a legal requirement but a critical component of effective trust
administration.
A changing landscape
The landscape for cash management is shifting. With the ECB's rate adjustment signalling lower yields
ahead, it is imperative for trustees and private client practitioners to re-evaluate how cash is treated
within the broader scope of asset management.
Integrating cash management into regular fiduciary reviews, as well as exploring partnerships to help
optimise cash returns and manage credit risk exposure, not only enhances financial outcomes for
beneficiaries but also solidifies the trust and confidence clients place in their financial guardians.
Now is the opportune moment for practitioners to bring cash management more into the fold of
regular asset reviews, ensuring every element of client portfolios is managed with the utmost
diligence and care, true to their fiduciary obligations.
[1] The G7 comprises Finance Ministers and Central Bank Governors of seven countries: Canada,
France, Germany, Italy, Japan, the UK and the US.
https://journal.step.org/step-journal-issue-4-2024/cash-king