Half of IFA firms earn 2% or less on cash reserves

A quarterly poll of UK independent financial advice firms by Flagstone found that more than half of the respondents earned 2% or less on their cash reserves over the past year. Only 6% of firms managed to secure a return higher than 4% on these funds. The research highlights a noticeable disconnect between how advisers manage client money and how they handle their own firms’ cash.

The vast majority of firms keep their cash in standard business accounts rather than specialized savings products. Almost half of the firms, at 45%, said they held most or all of their cash reserves in a business current account. An additional 41% kept their funds solely in instant-access business savings accounts. This reliance on basic banking products limits the potential returns available to these firms.

Only 21% of the firms surveyed currently use a cash deposit platform to manage their reserves. Another 19% utilize a mix of instant-access, notice, and fixed-term business savings accounts. The findings suggest that many firms lack the time or resources to actively manage their cash positions.

The data strongly suggests that these firms haven’t, in the main, the time or resources to take advantage of the wealth of high-interest business savings options available to them as SMEs. With a high base rate and stubborn inflation, the proliferation of high-interest options that would make an IFA firm’s cash work harder remains high, yet few are utilizing them.

Despite the low returns, many firms recognize that better cash management could help. More than seven in 10 IFA firms said a cash deposit platform would help them access better rates without too much effort. About 31% noted that using such a platform would help them “practise what they preach” regarding managing client assets efficiently.

John Martin, chief product officer at Flagstone, said the findings showed firms recognized the potential benefits of better cash management but were not always converting that awareness into action. He noted that high proportions of IFAs see the value of better cash management and even recognize the benefits of cash deposit platforms to help them achieve better returns amid higher risk protection.

That means that now greater work needs to happen to convert that ability to see the benefits into real action. Many advisers are aware of the financial opportunity they are missing, yet the practical steps required to secure higher interest rates are not being taken at scale.

The research also examined how firms manage Financial Services Compensation Scheme protection across their cash reserves. Some 37% of IFA firms said they observe FSCS rules in relation to their reserves. The survey found that 51% of firms had £120,000 or less in cash reserves, while 9% had more than £120,000 but did not observe FSCS protection rules.

Among the latter group, 5% of all firms said they did not observe FSCS rules because managing separate bank accounts was too time-consuming. This administrative burden appears to be a significant barrier to proper financial management for these smaller firms.

Only 4% of IFA firms did not know how much interest their cash reserves had earned over the previous 12 months. This lack of awareness further complicates efforts to improve the financial health of the advisory sector, as firms cannot effectively evaluate their performance without clear data on their returns.