Client behavior and cash: An interview with Flourish CEO Max Lane

Flourish CEO shares his thoughts on how the value of understanding clients' emotional needs for advisors and how it can benefit the advisory relationship.

Flourish: When it comes to cash, what is the opportunity for advisors who work to understand their clients’ behavior?

Max: Advisors have an opportunity to better understand that certain asset classes have more of an emotional connection than others – and that cash is one of them. While an advisor may think that wealth is wealth, regardless of the account it’s held in, people tend to psychologically favor money in the bank vs money in a portfolio for a variety of reasons: It helps people sleep well at night, feel more secure, or helps them feel more confident about the future. When it comes to cash, clients often think about cash in the bank as completely distinct from funds in their portfolio, and often approach those assets very differently – even if it means holding more cash than is mathematically "optimal." Behavioral finance provides a great backdrop to understanding some of the client behavior when it comes to cash. 

Flourish: Why do people make financial decisions that are counter to what is favorable from a mathematical perspective? 

Max: Humans are humans at the end of the day. We opt for the cheeseburger when we know the salad is the healthier choice. For advisors managing a portfolio, there’s the mathematical side of correlations of expected returns and expected volatility paired with goals. And then there’s the emotional and behavioral side. If you have a financial plan or portfolio that is not aligned with the personality of the client, they’re much less likely to stick with the plan. Cash is an example of that. If a client feels better and more confident in their daily life when they have $500,000 in the bank, then their advisor needs to find a middle ground between the optimal investment strategy and the optimal emotional strategy. People often fall back to what ultimately makes them emotionally comfortable – their default state. When times get tough in the market, that’s when a client is most likely to abandon the strategy. Clients who are comfortable with their cash holdings are more likely to stay committed to the broader financial plan in times of turmoil. 

Flourish: Is that optimal place the way that they can get clients to move beyond the default state? Is that how advisors can combat client inertia?

Max: Inertia is even simpler to explain. For many of us, myself included, any deviation or change – even if it’s for your benefit – equates to work or a chore in our minds. Whether you want to call it laziness or the power of default, humans psychologically perceive any change from what we’re doing today as bigger than it often is. With cash in particular, there has to be a big enough carrot to warrant any sort of action. At Flourish, we’ve made it as simple as possible to help clients start earning a competitive rate on their cash in an effort to lower the barrier.^§ It takes just a few minutes to set up an account, clients can make transfers in a few clicks, and there are no minimums or Flourish account fees.^∫ All in an effort to combat inertia and inspire action. 

Flourish: You’ve referenced two hurdles – the emotional one and the technological one – which can both prevent clients from following the advice of their advisor. How does Flourish differ from other cash solutions? 

Max: When we talk about Flourish Cash,^† one of the questions we hear is “Why wouldn’t I just pull that money into the portfolio and buy Treasurys or money market funds?” That question leads to an interesting psychological aspect: many investors treat money held away from their advisor in a cash account differently than they treat money in the portfolio. It's a nuanced, but important point.

Flourish Cash occupies an in-between state that helps clients earn a great rate while preserving the behavioral benefits of the client maintaining control. It’s still a client-managed account with many of the banking-like features that clients desire from an accessibility standpoint: an account and routing number, an intuitive interface, easy transfers in and out, daily liquidity, FDIC protection, and more.^| It offers clients the features that they need from a cash account – and so much more – and offers the functionality to bring that client’s cash assets into the advisor’s purview. In contrast, pulling the dollars into a brokerage account that’s actually in the portfolio causes investors to feel like they are giving up control and accessibility. As one advisor commented, “Clients don’t like having to call me and ask for their money.”

Flourish: Once advisors understand the role of emotions when it comes to client cash, what can they do next?

Max: When many of our advisors have initial conversations with their clients about optimizing their held-away cash, they discover that they are holding more cash than the advisor was aware of – often much more than the advisor would like them to hold. Clients with a self-reported net worth of $1-2MM hold an average of $194,716 in Flourish Cash accounts.¹ For some clients, advisors will have a conversation on the optimal cash amount, then rebalance and pull some of the cash into the portfolio. For other clients, they are going to hold a quarter million dollars in cash regardless of what their advisor thinks. The next best thing advisors can do in this case is ensure they’re optimizing that money for the client. You should always be working to find the best outcome for each personal situation and that’s going to be different for each client.

In either case, having a conversation about cash creates an opportunity for advisors. In the first case, the advisor can work to understand the held-away cash position, have a conversation, and potentially pull part of that position into the portfolio, which is to the benefit of you and the client. In the other case, for whatever psychological or emotional reason, the client is going to want to maintain that balance. However, the advisor can add value for that client and improve that holding from a yield, protection, accessibility, and visibility standpoint. If I’m an advisor, both of those are wins in my book. In either case, the first step is unearthing clients’ held-away cash so that you can see the full cash picture and have the conversation. That creates an opportunity to deepen the relationship, grow your business, and improve your rapport with your client. 

Flourish: So it’s about optimizing the situation within the bounds of the clients emotional needs? 

Max: Optimizing the situation relative to that client’s emotional profile. Success looks different depending on which client you’re talking about. The conversation is very different from an opportunity-cost perspective than it was in 2022 when interest rates were close to zero. As interest rates have increased past a certain threshold, advisors and clients clearly price the opportunity cost differently. Psychologically, clients and advisors react very differently if interest earned goes from a few hundred dollars to a few thousand dollars. More clients care about this now than they did previously because the absolute dollars have increased dramatically. It creates an opportunity for advisors to add value and create a new, better default state for clients’ reserve cash.

Once you set clients up with Flourish Cash, you’ve made that client better off by giving them access to rates that are vastly higher than the national savings account average,^# a solution where they retain control of their money, and the expanded value that visibility brings.

Rates go up, rates go down. Not every asset class performs well every year, every ten years even. But a lot of advisors believe that over a long enough amount of time you’re going to come out ahead by sticking with the strategy. I think held-away cash is the same. Whether it’s with Flourish Cash or another solution, make sure your client’s reserve cash is earning a rate much closer to the Fed Funds rate and that they are optimizing FDIC coverage. If you let them just keep it in the average bank account, you’re almost guaranteeing that, no matter what the rate is, they’re pretty much earning zero. All clients hold cash and, whether it’s $5,000 or $5,000,000, all clients will be excited to earn more. The time is now.