Over half of wealth and advice firms earn 2% or less on cash reserves

More than half (56 per cent) of UK independent financial advice (IFA) and wealth management firms earned 2 per cent or less on their cash reserves in the past 12 months, Flagstone has revealed.

The firm’s latest quarterly poll found that just 6 per cent of firms earned over 4 per cent, while 4 per cent of IFA firms did not know how much interest their cash reserves earned in the last year.

Flagstone said a crucial explanation for why a large proportion of firms are earning so little on their cash can be found in where these reserves are held, with 45 per cent keeping most or all of their reserves in a business current account, while 41 per cent only hold cash reserves in instant access business savings accounts.

Flagstone chief product officer, John Martin, stated: "This data strongly suggests that these firms haven’t, in the main, the time or resources to take advantage of the wealth of high interest options available to them as SMEs.

"That’s where low-friction solutions come into their own. A high base rate and stubborn inflation mean that the proliferation of high interest business savings options that would make an IFA firm’s cash work harder remains high."

The fintech company also revealed that 37 per cent of IFA firms observe FSCS rules in relation to their cash reserves, but this proportion doesn’t suggest a “widespread disregard” for FSCS protection.

Over half (51 per cent) of IFA firms have £120,000 or less in cash reserves, making the regulator’s adherence non-essential, and the data suggests that 9 per cent of firms have more than £120,000 in cash but do not observe FSCS protection rules.

A fifth (19 per cent) of IFA firms told Flagstone that they manage their cash reserves in a combination of instant access, notice and fixed term business savings accounts. The same proportion (21 per cent) use a cash deposit platform like Flagstone.

The platform said that encouragingly, 73 per cent acknowledge that a cash deposit platform would help them access the best rates for their cash without too much effort, while 31 per cent said that use of a platform would help them "practice what they preach".

Martin concluded: "High proportions of IFAs see the value of better cash management and even recognise 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 to take advantage of them.

"IFA firms aren’t immune to the pressures facing SMEs throughout the UK: high business rates and employment costs, and late payments are universally challenging.

"Just as they advise their clients to make shrewd financial decisions, we’ll be fascinated to see how more IFAs can be tempted to explore fast, flexible and efficient ways to safely turn their dormant cash reserves into secure and active income generation vehicles."

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