The collapse of three banks in the United States this week: Silvergate, Silicon Valley Bank, and Signature Bank exposed many problems in the U.S. banking system that are a combination of poor risk management, failure to understand and respond to economic conditions, and companies and other banks flagrantly violating the maximum insurance protections afforded to all U.S. bank customers through the FDIC (Federal Depositor’s Insurance Corporation).
At nVest Advisors, we’ve been warning about inflation and an imminent recession for over a year now. We publish a weekly Macroeconomic Update every Monday and have been keeping our clients informed and actively protecting their investment assets against this inevitable recession since January 2022 by using data-dependent macroeconomic investing strategy, diversifying their holdings, eliminating their exposure to the sectors of the economy that always underperform during periods like this, and maximizing the insurance protections available for their accounts.
Sadly, not every financial advisor, company CFO, and bank risk manager was doing the same, as we discovered that over 85% of the deposit accounts at these failed banks had balances far in excess of the $250,000 in insurance protection the FDIC gives every depositor. The bank failures panicked Wall Street because it became evident that many hundreds or even thousands of mostly tech companies would not have access to their operating capital without the government stepping in.
The result was emergency actions taken by the U.S. Treasury, the FDIC, and the Federal Reserve Bank to shore up faith and confidence in the U.S. banking system by guaranteeing the entire amount of deposited funds in these banks, but we’re now seeing that there are still problems accessing funds for many people, even people who did not directly have money in any of these failed institutions, but their banks did.
As a small business owner, you need to protect what you’ve built. You already have to invest heavily in your company, so in some ways, your own investments are heavily focused on the success or failure of one company (this is already the opposite of being a diversified investor). Please don’t make the same mistake with your company’s assets.
When running a small business, it’s important to have some liquid assets to meet immediate needs or to invest in growth opportunities. FDIC-insured bank accounts are wonderful, and we use them as well at nVest Advisors, but you must know the maximum protections afforded to you in each account, bank or custodian, and follow those limits.
Thankfully there are great strategies available to help you do that, from using investment custodians like Charles Schwab or Betterment (two of our primary investment custodians) that offer FDIC insurance and SIPC insurance for balances over $1,000,000 is just one strategy that we discuss below. But there are other forms of liquidity besides cash that can offer you even better diversification for your company’s cash needs.
Think of cash as just one form of liquidity. There are many others. Liquid investments are simply those that can be easily converted into cash without significant loss of value. Here is a brief look at some of the most liquid investments available to small businesses.
Money Market Accounts
A money market account is a type of savings account that pays interest based on current market interest rates. These accounts are FDIC-insured up to $250,000 per depositor, per account type, per insured bank. Money market accounts typically offer higher interest rates than traditional savings accounts, making them a popular choice for small businesses looking to earn interest on their cash while maintaining liquidity.
Certificates of Deposit (CDs)
A certificate of deposit (CD) is a savings account that requires a fixed amount of money to be deposited for a fixed period of time, typically ranging from three months to five years. CDs offer a fixed interest rate that is higher than traditional savings accounts, making them an attractive option for businesses looking for a safe, predictable return on their investment. CDs are also FDIC-insured up to $250,000 per depositor, per account type, per insured bank.
Treasury bills (T-bills) are short-term debt instruments issued by the US government to finance its operations. T-bills are considered to be one of the safest investments available because they are backed by the full faith and credit of the US government. They are also highly liquid and can be bought and sold easily in the secondary market. T-bills are issued in maturities ranging from four weeks to one year and are sold at a discount to their face value, meaning that investors earn interest by buying them at a discount and then receiving the full face value at maturity.
Commercial paper is a short-term debt instrument issued by corporations to fund their day-to-day operations. It is typically issued with maturities ranging from one to 270 days and is backed by the creditworthiness of the issuing company. Because commercial paper is typically issued by large, financially stable companies, it is considered to be a relatively safe investment. Commercial paper is also highly liquid and can be bought and sold easily in the secondary market.
Money Market Funds
A money market fund is a type of mutual fund that invests in low-risk, short-term debt securities such as government bonds and commercial paper. Money market funds are designed to maintain a stable net asset value (NAV) of $1 per share, making them a relatively safe and predictable investment. They are also highly liquid and can be bought and sold easily, making them a popular choice for businesses looking for a combination of safety, liquidity, and yield.
Corporate bonds are debt securities issued by corporations to fund their operations or expansion. They typically have maturities ranging from one to 30 years and pay a fixed or variable rate of interest. Corporate bonds are considered to be riskier than government bonds because they are backed by the creditworthiness of the issuing company rather than the full faith and credit of the US government. However, they can offer higher yields than government bonds, making them a popular choice for investors looking for income. Corporate bonds are also highly liquid and can be bought and sold easily in the secondary market.
A way to put it all together that is safer than the bank
Use your investment custodian to increase your insurance protections and a fiduciary financial advisor to act as your company’s risk manager for those assets.
Only a few of the strategies we discussed above are available in your local bank or credit union. But all of them, and even a few others, can be done in an investment account, under the guidance of a fiduciary financial advisor. This affords you several additional advantages:
- You can have FDIC insured cash balances, treasury /agency bonds, money market funds, commercial paper, and more, all in the same account. This makes reconciling and tracking easy, you’ll have one person (your advisor) to speak to, liquidity is easy because ACH and wire transfers are always available, and your account(s) have both expanded FIDC insurance for true cash balances and additional SIPC insurance on the invested portions. The custodians we use offer more than $1,000,000 in both FDIC and SIPC insurance for our clients.
- You have another set of eyes – a trained fiduciary – on both the investments and the safety of the custodian.
Notice that we said you need a fiduciary financial advisor for this role. We cannot stress that enough. Most investment managers and financial advisors work on commission, and while there are good, honest, and trustworthy advisors who earn their pay making sales, there is a strong incentive to use expensive products (that often are less liquid or come with deferred sales or “surrender” charges) if you need to sell them quickly, and none of them are legally held to a true fiduciary standard. In contrast, a fiduciary advisor, like nVest Advisors, is legally obligated to operate entirely in your best interests and care for your money with the same due diligence we give our own.
The bottom line
Small businesses looking for liquid investments have a variety of options to choose from. Money market accounts, CDs, T-bills, commercial paper, money market funds, and corporate bonds are all highly liquid investments that can be easily converted into cash without significant loss of value. However, it’s important to consider the risks and potential returns associated with each investment and to consult with a fiduciary financial advisor before making any investment decisions or deciding where to house your liquid assets.
As a small business ourselves, nVest Advisors is deeply committed to helping small businesses and their teams thrive and prosper. From financial planning for both the owners and employees of the business to fiduciary management of your SEP IRA, SIMPLE IRA, 401(k), 403(b), HSA, college savings plans, and other benefits options, we strive to be an integral part of your team’s financial well-being. And being a small company ourselves, we’re small enough to develop a close working relationship with your company and have the resources and investment partners to handle even the largest 401(k) needs.
If your company is looking for solutions to today’s banking crisis, or would like a competitive bid for your current programs, or if you need to start a new benefits plan from scratch, we’d love to partner with you. Feel free to schedule a complimentary one-hour due diligence meeting with CEO Jeremy Torgerson, to discuss your needs.