Default cash allocations earning negative rates
SMSF advisers could be earning a negative rate of interest on their clients’ cash allocations if they retain them in the default cash management option within their platform, given the current ultra-low interest rate environment, according to an ETF provider.
Betashares managing director Alex Vynokur told SMSF Adviser with the top five adviser platforms on the market currently offering an average interest rate of 0.24 [of a percentage point] on their cash management accounts, advisers could actually be paying to park their clients’ cash in these default options.
“When interest rates are high, 50 basis points or 100 basis points less is sometimes masked by virtue of the fact that rates are high, but we are now getting to the point where platforms are paying close to zero,” Mr Vynokur said.
“After the fee, some of them are in the situation where there is a negative interest rate being charged on cash, so that is a very sensitive area for advisers.”
He added that this presented a conundrum for advisers due to their best interest duty obligations and the amount of time taken to consistently shop around for a better rate for clients’ cash allocations.
“We see a portion of investors who are happy always hunting around for honeymoon rates from banks, but it requires a lot of work, it’s administratively burdensome, and in the context of an SMSF adviser, they do not have the time and resources and they don’t get paid by their clients to be doing that,” Mr Vynokur said.
Following three consecutive rate cuts in 2019 so far, he said client funds had poured into Betashares’ high-interest cash ETF, which currently offered a 1.25 per cent interest rate after fees and had around $1.8 billion in assets under management.
“A lot of that has been coming into the fund over the course of the last few quarters, mostly from advisers in the context of them understanding the best interest duty they have post-FOFA, coupled with the fact that the rate interest platforms are providing is deteriorating significantly,” Mr Vynokur said.
“It’s natural for people to be reassessing how they invest their cash in a low interest rate environment — we have never seen rates as low as 0.75 [of a percentage point], so this is a new world for clients and advisers of SMSFs.”
