For much of the past four years, holding substantial amounts of cash has been an unusually easy investment decision to defend.
After the Federal Reserve moved interest rates sharply higher in 2022, money-market funds suddenly offered something investors had not seen in years: meaningful income with very little apparent risk. Retail money-market fund assets have climbed above $3 trillion, according to the Investment Company Institute, hovering near a record. And that figure excludes the trillions of dollars held in institutional money-market vehicles.
The appeal is understandable. Investors can earn roughly 3.5% today without taking meaningful duration or equity-market risk. For clients who remember earning virtually nothing on cash before 2022, that can feel like a rational place to wait.
But the investment question has changed.
The issue for advisors is no longer whether cash can generate a respectable nominal return. It is whether keeping unusually large cash balances still represents the best use of capital when inflation is running at approximately the same level as money-market yields, and when investors can potentially lock in higher yields elsewhere.
For many portfolios, the answer is increasingly no.
Cash Has Quietly Become an Asset Allocation Decision
One of the most important developments since 2022 is that cash stopped being merely a liquidity reserve and became, for many investors, a strategic asset allocation.
That distinction matters.
Cash traditionally serves several purposes: funding near-term spending, providing an emergency reserve, reducing portfolio volatility and creating dry powder for future opportunities. Those are legitimate objectives.
The problem arises when cash begins to serve another purpose: avoiding uncertainty.
With more than $3 trillion in retail money-market funds, there is little reason to believe every dollar represents a carefully calculated liquidity requirement. Some portion is likely there because investors have become comfortable with the combination of liquidity, stability and a yield that once exceeded 5%.
That comfort can become an investment risk.
A money-market fund yielding 3.49%, based on Crane Data’s current average, is attractive compared with the near-zero yields investors saw before 2022. But the relevant comparison is not the yield investors remember. It is the return available from cash relative to inflation, taxes and alternative investments.
If cash is yielding approximately the inflation rate, its real purchasing-power return is close to zero before taxes.
For a client in a higher tax bracket, the real after-tax return can be negative.
That is a very different proposition from the one investors experienced when money-market yields were above 5%.
The Reinvestment Risk Advisors Should Be Watching
There is another issue that deserves more attention in client conversations: reinvestment risk.
Money-market funds are floating-rate instruments in practical terms. As short-term interest rates decline, the income they generate tends to decline as well.
That means investors who have become accustomed to today’s cash yield may be assuming that the income will persist when it may not.
Longer-duration bonds introduce a different risk profile, but they also provide an important benefit: the ability to lock in a yield for a longer period.
If an investor purchases a bond today and holds it to maturity, the contractual interest payments are not reset every few weeks simply because short-term rates decline. A portfolio of high-quality intermediate- or longer-duration bonds can therefore provide a measure of income visibility that cash cannot.
This creates an important distinction for advisors.
The choice is not simply “cash versus bonds.” It is partly a choice between floating income with high liquidity and locked-in income with greater price sensitivity.
Neither is universally superior. But clients should understand what they are actually buying.
The Case Against Going Too Far in the Other Direction
The answer, however, is not to eliminate cash.
That would be an equally simplistic response.
Bonds can decline in market value when interest rates rise. Corporate bonds introduce credit risk. Municipal bonds involve issuer and duration considerations. Private credit introduces liquidity, valuation and underwriting risks that are fundamentally different from those of money-market funds.
Even strategies marketed as alternatives to traditional fixed income, including buffer ETFs, can involve complicated payoff structures and should not be treated as cash substitutes simply because they seek to limit certain market losses.
For advisors, the critical task is therefore not persuading clients to move cash into something with a higher headline yield.
It is determining why the cash exists in the first place.
A client who expects to make a large purchase within 12 months has a fundamentally different cash requirement from a retiree who has accumulated several years of living expenses in money-market funds. Likewise, a business owner preparing for a transaction may rationally want substantial liquidity even if the expected return is low.
The problem is excess cash that has no identifiable job.
A Better Framework: Give Every Dollar a Job
Advisors can make the conversation more productive by moving away from the question, “How much cash should you have?” and toward, “What does each portion of your cash need to accomplish?”
A useful framework is to divide cash into three categories.
Operating liquidity covers expected spending and known obligations. This money should prioritize safety and accessibility over return.
Strategic reserves cover less predictable needs, such as major purchases, business opportunities, tax obligations or unexpected family expenses. Some additional liquidity may be appropriate here, depending on the client.
Investment capital is money that does not have a foreseeable near-term use. Once assets fall into this category, keeping them indefinitely in a money-market fund should be treated as an investment decision—not a neutral one.
That last category deserves particular scrutiny.
If a client has $1 million in cash but only $200,000 is required for foreseeable liquidity needs, the remaining $800,000 is effectively an asset allocation choice. The advisor should be able to explain why that capital is being held in cash rather than bonds, equities or another appropriate investment.
Sometimes the answer will be compelling.
Sometimes it will simply be inertia.
What Advisors Should Be Saying to Clients
The most effective conversation is unlikely to begin with, “Cash is a bad investment.”
That framing creates unnecessary resistance.
Instead, advisors can acknowledge why clients like cash while explaining the trade-off.
A useful question is: “Do you want today’s cash yield, or do you want to secure income for a longer period?”
That question gets directly to the issue.
If rates decline, the yield on money-market funds, high-yield savings accounts and many certificates of deposit is likely to decline as well. Investors who want to preserve today’s income may therefore need to consider extending duration.
For some clients, that could mean high-quality Treasuries or investment-grade bonds. For others, municipal bonds may make sense after considering their tax situation. Corporate bonds may offer additional income in exchange for credit risk.
The appropriate solution depends on the portfolio—not on which asset currently has the highest yield.
Beware of Yield Chasing in Disguise
The growing appeal of alternatives also creates a second challenge.
When advisors tell clients that cash is no longer attractive, clients may naturally ask where they should go instead. That can create pressure to reach for yield.
This is where discipline matters.
A move from a money-market fund yielding 3.49% into a substantially riskier asset offering 6%, 7% or 8% is not simply a yield upgrade. The investor is being compensated for accepting additional duration, credit, liquidity, complexity or market risk.
Advisors should make that trade-off explicit.
Private credit, structured products and buffer ETFs may have legitimate roles in sophisticated portfolios. But they should be evaluated according to their risks and portfolio function, not because they offer a more attractive number next to the word “yield.”
The goal is not to maximize income.
It is to maximize the probability of achieving the client’s objectives.
The Portfolio Review Opportunity
Large cash balances create a useful opening for advisors to revisit portfolio architecture more broadly.
Rather than treating cash as a standalone issue, advisors should examine liquidity needs, fixed-income duration, tax exposure, credit quality and the portfolio’s expected spending requirements together.
That review can reveal mismatches.
A client may be holding excessive cash while simultaneously owning long-duration equities and having insufficient high-quality fixed income. Another may have enough liquidity but too much exposure to lower-quality credit. A third may have accumulated cash because of market anxiety rather than a financial planning need.
Each situation calls for a different response.
The most important point is that the cash allocation should be intentional.
Cash Still Has a Role. It Just Shouldn’t Be the Default
The post-2022 environment taught investors an important lesson: cash can once again produce meaningful income.
The next phase may teach a different one: a high cash yield is not necessarily a high real return, and today’s yield is not guaranteed to be tomorrow’s yield.
For wealth advisors, that makes this an ideal moment to revisit clients’ cash allocations without turning the discussion into a market-timing exercise.
The objective should be neither “get out of cash” nor “stay in cash.”
It should be to determine how much liquidity the client genuinely needs, how much purchasing-power risk the client can tolerate, and where the remaining capital has the highest probability of accomplishing its intended purpose.
That is ultimately the advisor’s value proposition.
Cash may be appropriate for the money a client needs soon. But money that does not need to be cash should have a reason for being there.
In an environment where cash yields are increasingly close to inflation, leaving large sums in money-market funds is no longer a decision without consequences. It is an allocation decision—and one that deserves the same level of scrutiny as every other major component of the portfolio.
