News & INSIGHTS

By Matt Liebman

The top story in the recent financial news has focused on the turmoil in the banking industry. This market action represents the first financial panic and sell-off since we left the big firm world and launched our Registered Independent Advisor (RIA) firm over two years ago. We want to share our thoughts and reflections on the current events and how they are different for our firm and clients now that we are an independent RIA firm.

Before we dive into our reflections, let’s review our understanding of what happened.  The capital markets have been volatile over the past week or so due to banking sector unrest. Last week and over the weekend, the Federal Deposit Insurance Corporation (FDIC) seized both Signature Bank and Silicon Valley bank. Fear of a contagion in the banking sector similar to the Global Financial Crisis of 2008 has caused extreme volatility in the share prices of multiple additional financial institutions. The United States Government has stepped in to protect all depositors of the two failed banks fully. While the demise of Silicon Valley Bank happened rather suddenly and quickly last week, the seeds of this story were planted over the past several years. During the Covid pandemic, the U.S. Government provided significant liquidity to assist the economy. The markets performed well in 2020 and 2021, particularly the Technology sector. Silicon Valley Bank, as the name would suggest, caters to employees, executives, and companies primarily in the technology and innovation sector. As a result, the bank was flooded with significant deposits in 2020 and 2021. The bank took a substantial portion of these deposits and invested them in longer-duration Treasury and Mortgage bonds. When interest rates rose in 2022, the value of the bank’s holdings declined. At the same time, the clientele of Silicon Valley Bank slowed deposits and began withdrawing money as their businesses suffered. Ultimately, the withdrawals and the losses of the investment portfolio caused a loss of confidence amongst too many of the bank’s customers to make the bank’s ongoing operations viable, leading to the FDIC seizure last week.

One enhancement of our current set-up during times like these is that the custodian does not our own firm, nor does that custodian employ us. While we are delighted with the custodian we chose for our clients, Fidelity Investments, we can judge their health and prospects clinically and objectively. We can relate to the unrest that advisors who are employees of banks or wall street firms may feel during times like these.  We were in their shoes until about two years ago. The focus of any elite advisor is on the well-being and safety of their client’s assets. That task becomes a lot more challenging when you are worried about the survivability of your employer. We find our current independent set-up refreshingly helpful in that we are able to keep a laser focus on our clients’ well-being without worrying about the health and veracity of our employer.

The second considerable advantage to our current set-up is the complete freedom to invest where we think our clients are best served from a risk-reward perspective. We have no parent company persuading or cajoling us to keep clients’ cash in an in-house deposit account or internal income fund.  For example, in numerous client accounts, we have been buying short-term individual Treasury bills and/or Treasury-Only money market accounts. The freedom to make this decision allowed us to put our clients in safer and – in many cases higher yielding – selections for their short-term cash and liquidity needs. If a client of a large firm is advised to keep their cash and liquidity assets in uninsured deposits or in-house products, are they really getting objective advice?  We do not have to worry about that here as we have no parent company directing where we hold our clients’ cash.

We are going through trying times as a country, economy, and financial services sector. The Wealth Management landscape has changed dramatically since the last banking panic.  We are relieved that we can help our clients navigate the current unrest and volatility from a position of strength and objectivity.