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Why examiners care
Why uninvested cash draws scrutiny
Three lines of concern overlap:
- Fiduciary — cash held outside the strategy creates a return drag the client doesn't expect, while the firm continues to charge management fees on the cash.
- Disclosure — if the brochure or IPS describes the firm investing assets according to a strategy, persistent large cash balances contradict that disclosure.
- Suitability — for a client whose IPS calls for, say, 60% equity exposure, an account sitting in 30% cash for months is misaligned with the stated profile.
Legitimate cash positions vs. drift
Cash is appropriate in many circumstances:
- Awaiting investment after a contribution.
- Reserved for upcoming distributions.
- Tactical defensive position with documented client agreement.
- Tax-loss-harvesting transition window.
Each of these has a defensible story. What examiners flag is the absence of a story — cash sitting idle beyond a reasonable window with no documented reason.
What "reasonable window" means
The rule of thumb is roughly five business days for transactional cash and 30 days for deliberate strategic cash, with longer windows acceptable when documented in the IPS or in a written client communication. Beyond those thresholds, an account that remains in heavy cash without an explanation in the file is exposed.
What examiners look for
- Cash policy in the IPS or in the firm's standard advisory agreement.
- Cash-balance monitoring across the book of business with a documented escalation path.
- Documentation of the reason when an account is significantly in cash for an extended period.
- Fee-billing review — fees should not be charged on cash beyond reasonable thresholds when the IPS indicates otherwise.
How StratiFi thinks about cash concentration
Cash concentration is the easiest deficiency to find and the easiest to prevent. The firms that get this right run a continuous cash-balance review — flag-and-explain rather than catch-and-correct — connected to the client's IPS. When an account moves into excess cash, the next action is a documented decision, not a missed opportunity.
Frequently asked questions
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What percentage of cash triggers SEC scrutiny in an advisory account?
There is no fixed threshold in the rules. Examiners focus on the IPS-stated cash band — typically 1 to 5% — and flag accounts that sit materially above that band for extended periods (30+ days) without documented rationale. The threshold is firm-defined; the documentation is what holds up. -
How should RIAs document cash concentration decisions?
Every account in elevated cash should have a dated note in the file naming the reason — pending allocation, distribution reserve, tactical defense, tax-loss-harvesting window. The IPS or advisory agreement should state the firm's cash policy and threshold, and a supervisory review record should show the firm checked the explanation against the policy. -
What does the SEC look for during a cash concentration exam?
Three things: a firm-wide cash policy in writing (in the IPS template or compliance manual); a monitoring process that flags accounts over the threshold across all custodians; and account-level documentation of why elevated cash is justified for each flagged account. Missing any one creates exposure. -
Should advisory fees be charged on uninvested cash?
It depends on the advisory agreement. Many firms exclude cash above a threshold from billing, and exams have flagged firms that bill on large idle cash positions while the IPS says assets are being actively managed. Match the billing practice to the disclosed strategy.