Brett Baker - Cash Management Case Study

Brett Baker, a paraplanner at Premier Financial Management, explains how he manages cash for clients who are taking income and why ring-fencing cash may be needed as an ‘extra buffer’ in the current dividend crisis.

We don't hold cash as part of our asset allocation, but we will use it for clients who are decumulating and need to take income from their portfolio. We find that cash is less important for clients who are in accumulation because their funds and investments tend to generate enough income to pay fees.

Our centralised drawdown proposition isn’t particularly strict - it's more a case of having 1-2 years in cash and then that frees us up to invest the rest of the money. It’s important that we have enough cash in there so that we don't have to sell down over the following 12 months. Ring-fencing cash ensures that automated sell down won’t happen and it also reduces administration, which is a big time saver. Ultimately, I think it’s in the best interest of the client in this situation.

At the moment we are in the middle of the Covid-19 crisis and we have some clients that are a little bit fearful of the markets, so they ask us to sell some of their portfolio to cash but still want the rest to stay invested. When there’s a review in a few months’ time, the client may want to rebalance their investments but still keep the cash and this is where ring-fencing is valuable again.

Looking ahead, the ability to ring-fence cash may also prove very useful in the likely event that lots of companies aren’t able to pay dividends over the next 12-18 months, in which case we will want to ring-fence extra cash. Normally we would have about 0.50% cash in our portfolios just for liquidity and it may be the case that we can keep our models fully invested and ring-fence cash separately, as an extra buffer.

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