Money market funds once were considered equivalent to cash. No longer. Under new rules that take effect October 14, 2016, money market funds may not be liquid in periods of market stress, meaning you may not be able to access your cash when you need it most. These changes will also affect how investors and their financial advisors think about money market funds in their portfolios.
The advantage of a money market fund was that shares of these funds behaved like cash. Their value held steady at one dollar per share and investors could buy and sell them at any point. Money market funds were viewed as a safe place to park cash, while earning slightly higher returns than a bank account.
The 2008 global financial crisis showed that these funds may not always be safe. When the Reserve Primary fund “broke the buck,” watching its shares dip below $1 for the first time, it sparked investors’ fears that their cash held in money market funds might not retain its value. The funds weren’t really cash after all.
In July 2014, regulators instituted new rules that are scheduled to take effect next month. These regulations alter how money market funds trade. Now, institutional money market funds — the shares of which are held by pension funds and other large institutions — must let their share price fluctuate according to the market, as all other mutual funds do. That means the shares may not always be worth $1.00. (Retail funds, owned by individual investors, will continue to have a mandated $1 share price.)
The main effect of the new rules on individuals will be to allow money market funds to limit investor redemptions in the event of extreme market volatility, and to impose fees on redemptions in such cases. Investors who wish to sell their shares when the markets are turbulent may not be able to do so, as these funds can impose gates on redemption for 10 days. Investors may also have to pay a fee to redeem their shares too.
If it costs extra to get your money back, and the funds can wait 10 days to return your cash to you, is a money market fund still the same as cash? Many investors and their financial advisors don’t think so. They are increasingly looking at higher-yielding, FDIC-insured savings accounts at online banks as a place to put cash to keep it safe and fully liquid.
Max can solve this problem. As an intelligent cash management service, Max automatically allocates investors’ cash between their existing checking or brokerage account and a portfolio of higher-yielding FDIC-insured savings accounts at the nation’s leading online banks. Most Max clients are earning more than 1.00% on their cash, with full FDIC insurance of up to $1.25 million per individual or $5 million per couple. By contrast, many bank or brokerage accounts pay only 0.01% or 0.02%.
Max is not a bank, nor does it provide financial advice. Max is a technology-driven tool that automatically helps clients spread their cash among higher-yielding online savings that they hold in their own name. Clients retain direct access to their funds, maintain their relationship with their primary checking-account bank or brokerage firm, and can continue to use all bank services like notaries and tellers. And, unlike money market funds under the new regulations, there are no gates to redemption, and no extra fees to withdraw money.
In addition to delivering a higher-yielding solution to clients, financial advisors can bring more cash into view, fostering more holistic asset allocation discussions and growing AUM.