The suitable level of safety is rarely ‘total’. Be it in driving, parenting, or investing, sacrificing some safety for opportunity is not only inevitable, but also (often) welcome.
However, much investment advice operates on the assumption that while the risks need managing, the safety manages itself. The focus is too often on getting the asset allocation right for the money that is invested, while forgetting that surplus cash is also an asset allocation decision.
Once a sensible buffer is in place, substantial excess cash is not a harmless waiting room. It is a low-risk, low-return allocation that may be costly, persistent, and unsuitable. There is little point carefully calibrating the equity/bond balance of a portfolio while ignoring the fact that too much of the client’s wealth is sitting outside the portfolio altogether.
After a suggestive nod towards a cash buffer of perhaps three to 12 months’ expenditure, ideally adjusted for income security, expected spending, liabilities, perceived liquidity needs, and emotional comfort, suitability assessments frequently start wherever the buffer ends. But the amount left in cash is not outside suitability.
A client’s overall position is shaped not only by the risk they take, but by the long-term cost of what they leave uninvested.
This is easy to understand. It is not okay to accept.
Regulators are unsurprisingly more alert to ‘too risky’ than ‘not risky enough’, and to immediate losses than to future lost opportunity. But this narrow focus on the risk of investment assets, rather than on the role those assets play in someone’s overall financial position, perpetuates several major errors in suitability design. It also contributes to the costliest investment mistake many people ever make: sitting on too much cash.
Safety first
If you were to diagnose chronic cash-holding from the usual remedies for it, such as a comparative growth-of-wealth chart, you’d think the problem was a lack of information or a powerful-enough calculator.
For some people, it is. They really do just need to see the right chart or be walked through a compounding calculation to act. But those who respond to the quantified cost of foregone returns are the least likely to have foregone those returns in the first place. For many clients, seeing that the implicit subscription they pay for an oversized safety net could cost more than their house is no guarantee of doing anything about it.
Knowing that investing surplus cash is sensible and simple doesn’t make it emotionally easy. They do not need more information. They need the right confidence, framing, timing, and support.
The overriding reason people get stuck in cash, even when they know why and how to invest, is a lack of emotional comfort at the moment of decision. People sit on mountains of cash not because it is secure, but because it feels secure. Failing to invest provides short-term emotional comfort in a very simple way: you cannot lose if you don’t get involved. That comfort comes at a very high price.
It is right to acknowledge this, but we needn’t accept the cost, nor dismiss it as too complex to combat. A good behavioural suitability process can provide the same emotional comfort without paying the price of underinvestment. Ensuring emotional comfort with investing should not be seen as an add-on to suitability, but an integral part of it.
Process, not persuasion
A common error in applying behavioural insights to investing is treating investors not as individuals, but as collections of inconvenient biases that need to be addressed in order to better fit the individual to the ‘objectively’ optimal solution.
Seen this way, behavioural insights are treated as persuasion tactics, to coerce a client into investing surplus cash, rather than an input into creating conditions where the client is simply comfortable doing so, with no added persuasion necessary.
The best way to keep short-term emotions from derailing long-term plans depends on each investor’s financial personality. Confidence, composure, familiarity preference, and impulsivity can all shape cash-deployment behaviour in different ways. Any effective approach needs to recognise perceived complexity, anxiety, mental bandwidth, and what is most relevant to an individual in the context of their life choices.
That comfort can be created through changes in:
- The investor’s environment, so it draws them towards a better decision;
- The narrative with which investing in general, or an investment in particular, is presented and therefore experienced; and
- The investments themselves, designed to increase comfort and reduce the need for difficult decisions, while recognising that a mechanically ‘perfect’ solution is not perfect if it requires the investor to behave like a machine.
Which changes matter most, and how they should be implemented, will differ by individual. The behavioural barriers to investing surplus cash are not universal. There is no objectively ‘best’ message to send – however well-crafted it may be, an adviser can send one message and have it be received in a dozen different ways.
There is an obvious tension here: between personalising solutions, and applying them at scale.
Fortunately, while investors aren’t identical, replaceable robots, neither are they infinitely disparate snowflakes. Statistical analysis of thousands of investors using Oxford Risk’s Financial Personality Assessment shows recurring clusters of behaviours and preferences. These investor personas can be used to tailor communications, journeys, and engagement strategies across the vast majority of investor situations.
Knowing how the messages you send are likely to be received by individual clients, you can more easily and reliably equip your clients with the emotional comfort they are seeking when they sit on surplus cash, and therefore provide it at a fraction of the cost.
Consumer duty should make this harder to ignore. If firms are expected to avoid foreseeable harm, support customers in pursuing their financial objectives, and deliver good outcomes, then chronic excess cash is not merely a behavioural curiosity. It is a client-outcomes problem hiding in plain sight. A suitability process that focuses only on the risk of what is invested, while neglecting the long-term cost of what remains uninvested, is still only doing half the job.
Suitability by design
Cash is a valuable source of emotional comfort. But over time that pull to safety comes at an unjustifiably high price. Successfully meeting a client’s need for comfort in less-costly ways should be a side-effect of a well-designed suitability process: one that recognises, accounts for, and attends to how each individual’s financial personality shapes their investing experience.
Behavioural insights can help firms identify why different clients hold excess cash, and how communications, journeys, and solutions can be personalised to make the next step feel clearer, safer, and more relevant.
The answer is not to battle against behaviours, or work around each one in isolation, but to work with them in the context of each individual’s overall position.
That is how cash deployment moves from persuasion to suitability: not pushing clients into markets, but helping them reach better long-term outcomes they can understand, accept, and sustain.
