HNW investors’ growing demand for cash and near-cash products in light of rising uncertainty poses a challenge to wealth mangers, limiting their overall earning potential, according to GlobalData, a leading data and analytics company.

Heike van den Hoevel, Senior Analyst for GlobalData explains: “Navigating this challenge means walking a fine line of addressing customers’ liquidity needs while meeting return expectations without having to suffer a drop in fee income. In order to succeed, offering cash management tools is a must.”

HNW investors have had little incentive to allocate funds to cash and near-cash investments in recent years, with rates at record lows across most of the developed world. The company’s latest report: ‘HNW Asset Allocation Trends 2019’ found that allocations dropped from 23.5% in 2015 to a mere 13.2% in 2018.

However, van den Hoevel explains: “This is changing – our data shows renewed appetite for cash and near-cash products. This will have a direct effect on wealth managers’ bottom line, limiting fee-earning potential. In addition, wealth managers will struggle to achieve the returns clients have become accustomed to over the past few years as interest rates remain low.

“But considering the current global economic outlook, a desire to build liquidity buffers to self-insure against economic and market shocks is unsurprising given the make-up of the global HNW population.”

According to GlobalData research, 46% of HNW investors have sourced their wealth through some kind of entrepreneurship. In many instances, their private and business operations and financials are highly intertwined. As uncertainty picks up entrepreneurs will feel the need to increase cash holdings as a safety buffer.”

While wealth managers should ensure that HNW investors are able to meet their liquidity needs, overly high cash holdings are a wealth manager’s worst enemy and generally depress returns given the minuscule APRs.

van den Hoevel adds: “The likes of Goldman Sachs’ securities-based lending service represent a solution in this context. Goldman Sachs Private Bank Select allows customers to apply for loans of $75,000–25m against securities portfolios of at least $150,000 in non-retirement AUM. Underwriting is automated and the loan can be repaid at any time, allowing investors to manage their liquidity needs more effectively without being overly dependent on cash and near-cash products.

“As global uncertainty is unlikely to subside any time soon, heightened HNW demand for liquidity is expected to persist, meaning offering cash management tools and credit is mandatory for any wealth manager.”

‘*’ Data taken from GlobalData’s 2018 Global Wealth Managers Survey of 358 respondents