Last summer, Paul Lewis of the BBC’s Moneybox programme wrote a provocative article arguing that since 1995, simply moving your cash each January into the best-buy deposit account would have mostly produced a better performance than investing it in a FTSE 100 tracker fund. Whatever you think of this comparison, Lewis’s advocacy of “active cash”—managing bank deposits to generate the highest returns rather than leaving them where they are regardless of the interest rate—is worth following, particularly now that decent rates are so hard to find.
The problem is that it is so difficult to do in practice. Opening new bank accounts is time-consuming and bureaucratic, thanks to the rules that banks must follow in areas such as money laundering. This helps to explain the massive inertia in the savings market that keeps so much money languishing in accounts where it earns next to nothing. Moving it somewhere better is just too much trouble, especially if the gain is just a few tenths of 1 per cent in extra interest. In any case, within weeks the new account will no longer be the best deal and we have to go through the whole process again.
This problem has already led to the appearance of online “cash management” services. These give their users a central account from which they can move their money between a wide range of banks to secure the best interest rates, without having to open an account personally with each bank. They can opt to receive alerts when new rates become available, enabling them to keep up with the market as the “best buy” options change.
One provider I looked at recently has links with about 25 banks including UK branches of foreign institutions. Deposits by individuals at each are capped at £75,000 to ensure users retain their insurance and the annual charge in this case ranges from 0.15 per cent to 0.25 per cent depending on how much cash you place with the service.
It’s a clever idea and I was told that on average users receive five times more interest income than they were getting previously, even after taking the provider’s fees into account. It sounds great, aside from one hitch—would-be clients must deposit at least £250,000 to start using this particular company’s services, which explains why it targets businesses, charities and wealthy individuals.
Other avenues may be about to open up, however. Hargreaves Lansdown, the UK’s leading retail investment company, has been working on a mass-market cash management service for more than a year and is apparently getting closer to making an announcement—it may even have done so by the time this column is published. When it opens for business this could start to make the savings market much more competitive for the rest of us, and give people who want to get the most out of their cash the tools they have lacked up to now.
It’s one of the great ironies of DIY investing: we can shuffle portfolios of shares, bonds and funds in a second, but managing cash, the essential fuel of every investment idea, remains so cumbersome by comparison. Perhaps technology is about to make another financial market work better for the individual investor.
