How financial firms make money from your cash

August 09, 2019

First on the docket today: a few updates about One Day In July. The firm has grown this year. We are now nine people between Burlington and Portsmouth with clients in 20 states. We received over 40 applications per employee hire, and this is a winnowed down number because applicants must write a series of custom essays to apply to One Day In July. The team you work with at One Day In July is the top 3% of talent, and I intend to keep it that way.

We manage $242 million, up over $80 million from just six months ago, for 457 clients. Our primary regulator switched from the State of Vermont to the SEC last year, and we are adjusting to that. We continue to be audited two to three different ways each year by independent auditors, depending on the year - and one audit is a surprise.

Two things to clarify for people, because these questions come up: 1. We enjoy helping people across the financial spectrum - this is not a high net worth only firm. It's part of our culture and it is embedded deeply in our mission. 2. On the other hand, we help a fair number of high net worth clients. "White shoe" firms like Morgan Stanley or Merrill Lynch pitch that they have something special for high net worth. Well, the fees are special, I'll say that! But otherwise I have seen no evidence, zero, that those fees are producing systematic excess investment returns at the same risk level. Quite the opposite, in my experience.

I know it's August and you want to go back to the beach, so I'll keep it short this month. As many of you know, we make a practice out of sleuthing out the hidden fee shenanigans of the industry. Hans Smith here at One Day In July is so good at it it's almost an avocation - I'll drop a big statement from a 401k plan on his desk and say "Hans, somewhere in this poundage of paper, somewhere on this processed timber-turned-parchment, it's there." And he always finds it, though it's not easy.

A big one, and I believe it is growing, is that financial firms carry too much cash for clients. Over an extended period of time, cash has been one of the worst performing asset classes. (1) Other than holding a bit for liquidity and bill payments, it doesn't have a point; it is almost certain to lose money over time when inflation in considered.

But large financial firms, and some "free" trading startups, see the opportunity in cash. They use clients' cash in their mortgage divisions, lending it at many times what they pay the investor, and pocket the difference. Instead of going to work for the investor, the cash is working for the financial firm.

It's a sleight of hand that is hard to see, because you need to know that there are better investments that are considered "safe," and the financial firm is not going to tell you this when billions of dollars of revenue are obtained by this trade. Over the years the "cash drag" will decrease the returns of the portfolio for the investor.

Back to the beach (Cape Codders - watch out for the Great Whites)! But as you search for your flip-flops, remember the age-old "Cash is King" adage in finance needs an asterisk.

Dan Cunningham

(1) Stocks for the Long Run by Jeremy Siegel, page 11.