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Personal Investment & Financial Planning Q`s/Cash Position in Managed Investment Portfolio


QUESTION: Hello.  My wife and I have a managed retirement investment portfolio, which is diversified.  Generally, we have an aggressive investment strategy because we are still fifteen to twenty years away from retirement.  For fees, we pay a percentage of our assets under management to the investment manager.  As part of this managed investment portfolio, the professional investment manager invests our money in various equities, bonds, mutual funds, and also has us invested in cash (a money market account) at 5 - 7 per cent of our total assets under management.  I need your help to understand why it makes sense for us to have any "cash position" as part of our investment portfolio.  The money market account makes a minuscule interest rate, and both our checking account and our savings account deliver a higher rate of return.  I understand that one should have a cash position as part of one's diversified portfolio, and one should have a cash position in the event of an emergency need for cash, but I don't understand why we should have cash in their money market account, given that our cash could make more interest in our checking or savings account at our local bank.  Does it make sense for us to have no "cash position" as part of our managed portfolio while separately keeping enough emergency cash in our savings account for when we might need it?  I learned that one use of the money market account is for the investment manager to take its fees monthly.  I offered to pay them their fees monthly after receiving their invoice for their fees monthly, in the same way that I would pay my telephone bill monthly.  What are your thoughts?  Thanks.

ANSWER: You are correct.  If you have adequate cash reserves outside of your investment accounts there is no need for additional cash reserves in your investment accounts.  How much “cash on hand” is prudent depends on many factors: whether you have steady income, the possibility of unforeseen large expenses, etc.   A rule of thumb is to have six months’ worth of regular expenses available in cash.  But don’t forget that most exchange traded securities are also highly liquid – i.e. they can be turned into cash quickly.  When you sell a stock you will have the cash from that sale in three days.  The risk is that equity fluctuates in value, so if you suddenly need cash, you may have to sell at price you don’t like.

Keeping some cash in an investment account is inevitable, just from the normal receipt of dividends, interest, and bond maturities before those receipts can be re-invested.  Generally, advisers like to keep as little as possible in cash because it is a drag on their (and your) earnings.  Of course, they may have more held in cash for “tactical reasons”, but if they do, they should justify that position.  You are not paying them to hold your cash!  In fact, if your adviser is charging a percentage of your assets as his “fee”, (a so-called “wrap fee”) then the return on the cash he is holding is actually significantly negative since you are paying him a fee for assets that are returning virtually zero.  I am not a fan of fees based on assets under management for that reason, among others.  Also, most advisers will want to deduct their fee directly from your account, as opposed to sending you a bill.  It is a lot safer and easier for them, but it does not justify keeping 5% to 7% in a money market account.

Hope this is helpful.  Good luck.

---------- FOLLOW-UP ----------

QUESTION: Do you think that a company like Morgan Stanley or Merrill Lynch would be willing to bill me monthly for their fees, or do you think that they would refuse to do business with me if I did not agree to them taking their fees out of my money market account?  Thanks for your thoughts and expertise!

Hello Bill,

If you have enough money with a broker, almost anything can be negotiated.  But for the vast majority of investors, you are stuck with their standard agreement, which is to allow them to debit your account.

From your question, I assume that you are in a “managed account” for which you pay a quarterly fee as a percentage assets under management, but no commissions.  An alternative is to switch to a straight brokerage account where you would pay commissions on trades, and no “wrap fee” (percentage of assets fee).  For most investors who do not trade frequently, this is usually a better option.  The large brokerages (disclosure: I was a financial adviser for Morgan Stanley) will aggressively try to move you to the managed account program.  It is much more lucrative for them.  

By sending you a bill rather than debiting your account, the brokerage is essentially extending you credit.  This may fall under the margin rule requirements, and the bank may suggest that you open a margin account.  They would then charge your margin account for the fee, and charge an interest rate for carrying this “loan”.  Margin loan rates vary by brokerage and the size of your account, but can be in excess of 6% p.a.   And the loan is limited to a percentage of the value of your account, and is secured by that account.  It is very good business for brokerages.

Another alternative you may wish to consider is moving to an on-line broker like Fidelity, Schwab, TD Ameritrade, Vanguard, etc.   You have to do a bit more work on your end, but the savings can be substantial.  For example, the minimum commission Morgan Stanley charges for a stock trade is $100.  At the on-line brokerages noted above, the fee is less than $10.

Hope this was helpful.   Good luck.

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John Guilford Kerr, CFP, CFA


I can answer questions related to personal financial planning, asset allocation, private equity investment analysis, fixed income, mutual fund, ETF, and stock questions, estate planning (basic), education planning, insurance planning, and business financial planning.


I have thirty-eight years of experience in finance, in the U.S. and internationally, for both public and private corporations. I have specialized in personal and small business financial planning and investment advisory services since 2005.------ - ten years commercial banking, New York, Paris, Houston, Charlotte, Atlanta---- - six years treasurer of a publicly traded health care company, Philadelphia----- - six years international project finance (Bechtel), San Francisco, Manila, London----- - five years head of international hotel development (Hyatt), Chicago---- - eleven years personal financial planning.----- Registered Investment Adviser, Hawaii---- FINRA General Securities Representative - Series 7---- FINRA Uniform Combined State Law - Series 66---- Resident Producer Insurance License, Hawaii-, Accident and Health or Sickness, Life, Variable Life and Variable Annuities

CFA Institute of Hawaii---- Certified Fiancial Planner Board of Standards, Inc-----. National Association of Personal Financial Advisers----- Financial Planning Association----- National Association of Tax Professionals

Project Finance Yearbook - 1997 / 1998 "Manila Water & Sewerage System Concession"----- "The Road To Helsinki, An Analysis of European International Relations Leading to the Conference On Security and Cooperation in Europe"' published 2015.

Certified Financial Planner, Certified Financial Planner Board of Standards, Inc.---- Chartered Financial Analyst, CFA Institute----- Certificate in Financial Planning, Boston University---- Masters in Foreign Affairs - University of Virginia---- Bachelors of Arts, Government - Ohio University

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