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8 min read

Can Cash Management Be Automated?

Why cash management is a problem. Why direct indexing makes it worse. And how automation can solve the problem. 



Tax management is a sexy problem (OK. That’s not a sentence I ever expected to write). What I mean by this is that everyone understands that tax-managing a portfolio is complicated, so automating it is kind of impressive. In contrast, automating the investment and withdrawal of cash seems dull. But if you look at the day-to-day lives of wealth managers, it turns out they spend a lot of time managing cash, which is a waste – wealth managers have a lot better things to do with their time. Cash management automation may be dull, but it’s important.

What’s so hard about cash management?  Here is a partial list of things a wealth advisor has to worry about: 

  • Does the account have excess cash? (Have I left some cash lying around uninvested?)
  • More generally, how do I minimize the amount of cash in the account but still have funds to pay for fees and prevent overdrafts when trading?
  • How do I withdraw cash for a client in a way that minimizes taxes but keeps the portfolio with the right risk level? (OK, I snuck tax management back in.)
  • If there are scheduled, periodic withdrawals, how do I manage the account to fund the withdrawals by accumulating income from interest and dividends?
  • How do I reserve cash from maturing bonds to be reinvested in bonds?
  • How do I prevent overdrafts if I’m trading instruments with mismatched settlement dates (e.g. selling equities and buying mutual funds)? And how do I prevent overdrafts if I’m selling bonds to buy equities, but it takes my bond desk a week to fulfill the order?
  • How do I quickly implement, across all my accounts, tactical asset allocation shifts to or from cash?


If you have separately management accounts (SMAs) in sleeves (subaccounts), there are a couple more things to worry about:  

  • How do I manage overall cash levels when cash holdings are spread across multiple SMAs?
  • When cash comes in (or is withdrawn), how do I calculate how much goes to (comes from) each SMA? How do I actually transfer the cash?

None of these tasks are all that hard taken individually. But taken as a whole, summed across your entire book, it becomes a time sink.

The good news is that every element we’ve listed can either be eliminated or automated. In particular, automated rebalancing systems will, yes, automatically:

  • Identify and invest excess cash
  • Find the tax-optimized way to withdraw cash while controlling risk
  • Reserve cash from dividends and interest to fund periodic withdrawals
  • Avoid overdrafts from trades involving mismatched settlement dates
  • Reserve cash from maturing bonds
  • Implement tactical asset allocation shifts to or from cash

As for SMAs, the best way to avoid the problems they create is to simply not use sleeves (see our Q&A on The Case Against Sleeves). Instead, manage portfolios holistically (what we call “post sleeves”).

As we said at the beginning, none of this sounds all that exciting. And (sadly) your clients are unlikely to know or appreciate that you do all this, but this is all the more reason to not spend your time doing it. That’s what automation is for.  

President, Co-Founder