“The growth rate we were experiencing [during the GFC] was 19 per cent [per annum], which was obviously at its peak and was very strong. At the moment, we’re finding that cash is growing at around 8 per cent [per annum] so it’s not growing as fast as what it was during that period, but we’re still getting significant growth in cash.
“It is a rebalancing by customers, and also financial planners, as cash has become part of the diversification of investment strategies for the individual. They’re paying attention, seeing cash as the viable asset class now.”
Simon adds that because “the demand for credit in this country significantly outweighs the amount of deposit holders” it’s now a wonderful environment for investors.
“They can actually get a much higher rate in comparison to what has ever happened before,” he says.
“So one of the outcomes of the GFC is the fact that it is very expensive for banks to access cash overseas, which means that they’re looking to their domestic customers to access cash to allow them to lend at a more competitive rate. They’re certainly fighting for cash from customers and obviously offering a higher interest rate to what’s ever been [offered] in the past.”
Keeping cash products relevant is vital to Premier and his team.
“We’re working closely with [the] financial planning community,” he says.
“We believe that the product we’ve got out there is a great offer for clients and financial planners. It also offers advisers the features of a traditional banking product with flexibility that they’re used to.
“We’re very excited that we’re able to meet a need in the marketplace and we’ve been getting very good feedback.”
The surplus cash in the market has created more competition between banks and the products they offer. While this is seen as a win for investors, it’s less clear how long this situation will last.
The Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding closed to new liabilities on March 31, 2010.
This meant Macquarie’s then-$9.9 billion Cash Management Trust (CMT) – the oldest in the country – would no longer be subject to the wholesale guarantee.
Macquarie proposed to convert investments in its CMT into investments in an at-call Cash Management Account (CMA), a product that would continue to be covered by the Government guarantee.
Forrest says there are a number of key differences between the CMT and CMA.
“One of the most significant benefits for investors [is] that the Macquarie CMA offers a higher rate of return than the Macquarie CMT did,” he says.
“Investors were able to transition from the Macquarie CMT to a Macquarie CMA while retaining the same functionality, BSB and account number, with no interruption to service.”
With cash expected to settle back to traditional long-term portfolio allocation levels, product providers nevertheless expect good demand for cash-based offerings.
Premier predicts that in the next 12 months “[what] we will see is that clients will start to [prefer] cash products, particularly as clients approach retirement age, as well as seeing the benefits of a flexible cash product, where you may be able to park cash for a period of time and then utilise it for another investment”.
“Cash will actually become a much more viable asset class as part of the overall portfolio for the client,” he says.
Because of this, clients are now asking where cash should sit in their portfolios and how much is actually appropriate.
“We advise that clients seek the advice of a professional financial planner,” Premier says.
“Because of the different needs of everyone, it’s very difficult to generalise for every case. What we would suggest is that they look carefully at the interest rate and the features of the cash management product to make sure [it meets] their circumstances.”
Michelle Hutchison, consumer advocate at financial comparison website RateCity, says the average online savings account is currently offering very good rates for savers and is therefore an ideal option for those who want certainty.
“The average online savings account rate has increased by 29 basis points, from 4.77 per cent in June to 5.06 per cent in October,” Hutchison says.
“While this is the average, there are even better deals on the market. For instance, Virgin Money’s Virgin Saver is at 6.75 per cent, although it’s only for four months, and UBank’s USaver account is offering 6.51 per cent.”
Hutchison says when it comes to term deposits, there haven’t been major movements overall from the four major banks, meaning rates may have hit their peak.
“With the higher costs of funding for institutions, it’s likely that these high term deposit rates could be starting to fall,” she says.
“This means that if you’re thinking about locking in a term deposit, now is the time, as you could miss out on significant savings.
“For instance, by locking away $50,000 into a 12-month term, at 5.96 per cent, you could earn almost $3000 at the end of the term. Compared to a rate of 4 per cent, for instance, you could miss out on almost $1000 of interest.”
Hutchison says three-month term deposits are the most popular among investors, and “we have noticed that they have dropped by 119 basis points since June, to an average rate of 3.60 per cent”.
“Average three-year terms have also dropped, but only by 16 basis points and are at a much higher rate than the average three-month terms at 6.28 per cent,” she says.
“Average 12-month terms have not moved since June, while six-month terms have increased by six basis points. One-month terms increased the most out of the term deposit rates in the study by 130 basis points to 4.90 per cent.
“This shows that there are currently much better returns for long-term term deposit accounts than short-term accounts.”
Although online savings accounts appear attractive to the average person, Hutchison recommends that they be examined with caution both by investors and advisers.
“[They] need to be careful of the terms and conditions associated with each online savings account as some have restrictions on how much you need to deposit or [the] minimum amount of withdrawals per month to be eligible to receive these high rates,” she says.
“For example, with the UBank Saver account, you must set up an automatic savings plan and deposit at least $200 each month.”
Simon says tying down money for a set period of time is a factor that should also be considered beforehand.
“Even though term deposits offer capital security guarantee and reliable income, the problem with this is firstly, the opportunity cost,” he says.
“Once they’re locked into that term deposit there’s an opportunity cost for various different areas, one of them obviously being growth markets. If you’ve locked in that term deposit, you’re not accessing growth markets so there’s a real opportunity cost there.
“The second is interest rates. If you’re in an increasing-interest-rate environment and you’re locked into a term deposit account, you’re fixed at that particular rate and you can’t change that until the deposit matures.
“The third trap would be the fact that all clients need to have a cash reserve where they can have immediate access and immediate liquidity for unforeseen and emergency circumstances. Money is tied up in a term deposit because of illiquidity and [this] prevents people from accessing [it] at short-term notice. These are the three real traps associated with cash.”
The CoreData-brandmanagement Australian Cash Report estimates it will take “somewhere between two to five years” to return excess cash allocations to longer-term historical levels.
Note: The RateCity study was conducted in October 2010. Term deposit rates are nominal rates based on a balance of $50,000.
