What’s Better for Clients Than Money Markets? Max.

This week, Max is at the T3 conference in Orange County, Ca., which is spurring us to think about financial advisors and how we can help them best serve their clients.

As financial advisors think about where to put their clients’ cash, many head automatically toward money market funds. But in today’s regulatory environment, where money market funds pay ultra-low rates and can force investors to pay redemption penalties in times of market turmoil, they may no longer be the best choice.

There is a better solution for cash held in brokerage or bank accounts. It’s called Max.  

Some statistics about cash: high-net-worth households in the U.S. are currently holding 23.7% of their assets in cash. That works out to a staggering $3.5 trillion, just among the top 4% of the U.S. population.

Most of this cash is being kept in the wrong place. In money market funds, it is under-earning its potential and it’s not insured.

Clients hold cash for a host of reasons, including as a reserve for a future real estate purchase, private equity capital call, or other asset buy. A recent U.S. Trust survey showed that a majority of clients were holding cash on the sidelines to serve as “dry powder” to capitalize on market opportunities. That’s the same reason why Warren Buffett has said he likes cash so much.

Most financial advisors think that clients aren’t holding much cash because what they see is the cash allocation within the client’s investment portfolio. The reality is that there’s a lot more cash sitting on the sidelines, out of view of the advisor. Most high net worth investors maintain multiple advisory relationships at several institutions. Advisors’ wallet share is only what clients choose to bring to them.

Where is this cash being held? Up until this point, the default for many financial advisors was to keep client cash in a money market fund. This is no longer best practice, especially in a fiduciary environment. It’s difficult to justify offering your clients less of a yield on uninsured cash when there’s a solution that allows them to earn more and stay FDIC-insured.

After the 2008 financial crisis, the SEC imposed new rules on money market funds, rendering them no longer a true cash equivalent. Under the new regulations, retail-held prime funds are subject to redemption gates of up to 10 days and redemption penalties of 1-2% in periods of financial stress. This means that your clients may not be able to access their funds when they need them most. At the same time, yields on money markets are still relatively low, and these funds are not insured.

How can Max solve these problems? Max offers a tool that lets advisors bring more cash into view, help clients earn more on that cash, and help ensure that cash is fully insured. We’ve created a better solution for cash, offering liquidity, higher yield, and greater FDIC insurance. Max doesn’t take custody of clients’ funds. Their cash stays in the client’s own name, while our software acts as a sort of air traffic control system, telling the banks to move funds among the client’s own accounts whenever it’s advantageous to do so to get better rates. In this manner, clients continuously earn the highest yield possible within the FDIC limits. That means Max members can keep up to $5 million per couple insured, and we have a partner solution that can deliver up to $50 million of FDIC coverage per tax ID for business accounts or complex trusts.

Now that money markets are considerably less attractive, isn’t it time to find a better way to manage cash? Learn more about Max at MaxForAdvisors.com.

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Money Market Funds: How New Rules Affect Cash

Max solves the liquidity problem that money market funds suffer under new rules taking effect in October 2016.

Max solves the liquidity problem that money market funds suffer under new rules taking effect in October 2016. CEO Gary Zimmerman explains in this video.

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.

Learn more about the Max Advisor Dashboard and how to get started with Max by visiting MaxForAdvisors.com. Or contact advisors@maxmyinterest.com with questions.

 

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Guest Post: Where to Go When Cash Is King

James Sanford of Sag Harbor Advisors

James Sanford of Sag Harbor Advisors

With interest rates remaining low, many investors wonder how to evaluate the safety of various places to keep cash. Max invited financial advisor James Sanford of Sag Harbor Advisors, a performance-fee-based wealth manager, to talk about how best to think about choices for cash in a portfolio.


By James Sanford

With the Federal Reserve now expected to wait at least until the December meeting to end 8 years of zero interest rates, and some strategists putting the first lift-off out to March or June of 2016, it’s time to revisit where to put your cash when cash is king. Two-year Treasury notes are now down to 63 basis points. Emerging market weakness in China and commodity-centric nations led to a 12% decline in the S&P 500 from July through September 28, and a surge in the Volatility Index (VIX) to over 40. If you’re with me in the camp to move a substantial amount of the portfolio to cash after the Central-Bank-fueled reversal rally of more than 10% since October 1, it’s important to understand where your broker or advisor places your cash, which is called the “cash sweep.” If swept into money market funds, you’re not in cash at all, but merely a basket of short-term risky securities that earn a paltry yield of zero to 15 basis points.

First, these underlying securities contain corporate credit risk of default like any other corporate bond. Second, there’s no legal guarantee of a “par put” from the manager. Money market funds routinely maintain a fixed $1.00 par value, rather than mark to market, a convenient shell-game trick which completely hides the underlying volatility of the basket of securities in the portfolio, convincing the holder he owns a “cash equivalent.” What he actually owns is a portfolio of risky corporate senior unsecured-debt obligations, which despite their 7, 10, or 90-day maturity, are equal in recovery and default risk to corporate long bonds maturing 10 and 30 years from now. Some money market funds hold tax-free municipal bonds. These are commonly considered “risk free,” which is absolutely not the case, as investors learned the hard way in Detroit, several cities in California and Rhode Island, and, soon, Puerto Rico.

Usually the portfolio in a money market fund doesn’t move at all in price, due to its very short duration. That’s until a shock event hits one of the securities, which was the case with the Lehman Brothers default. Lehman, opened up Monday morning, September 15, 2008, at a bid-offer of $10 to 12 cents on the dollar.  Suddenly this “cash” equivalent lost 90 cents on the dollar. Roughly 35 to 40% of all investment company assets are comprised of money market funds, with 80% of corporations using money market funds to manage their cash balances, and 20% of household cash balances comprised of money market funds, according to a 2009 SEC report.

There is an investor perception that money market funds are insured by the manager due to the “never break the buck” concept. In fact, there is no legal requirement or guarantee that money managers must “never break the buck” or shield investors from losses. Many managers in 2008 compensated investors for losses in money market funds, because it was good for business and they had the capital. Those without the capital, such as the Reserve Fund, did not. Nobody legally had to.

So what advice would I give investors, as a financial advisor? Keep your cash in short-term T-bills? But there is very little if any interest. Take duration risk on longer dated Treasuries?  No.

The answer is more obvious then we think: it’s your common bank savings account. Investors can earn up to 1.1% on internet-only savings accounts that are 100% FDIC guaranteed, a guarantee as solid as U.S. Treasury bonds, yet one that offers overnight liquidity and no duration risk. In fact, investors would have to go all the way to the three-year note to earn a yield equal to the highest available online savings rates of 1.1%.  The counterparty risk of the bank offering the rate is immaterial. As long as it’s FDIC guaranteed, even in the event of an FDIC bank seizure, accounts holders with $250,000 or less, or $500,000 in a joint account for couples, will have unrestricted access to their cash. If the FDIC can’t honor its agreement, all investments will be set to zero. That would be the equivalent of a U.S. government default.

Advisors often don’t like using a savings account as the cash sweep option, as they can’t control the assets. At Sag Harbor Advisors, our clients’ advisor accounts at our custodian are linked via the ACH system to any bank account of their choice, and clients sign over authorization to draw specified funds back to the advisor account should we see market opportunities. For cash holdings that are well north of the FDIC limits, MaxMyInterest is the only way to efficiently manage funds.

Ask your advisor where your cash sweep is, what it’s yielding, and you might find it’s not really “cash” at all.  

 

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New Money Market Fund Rules: How will they affect investors?

S.E.C. Approves Rules on Money Market Funds

S.E.C. Approves Rules on Money Market Funds

When investors think about their portfolios, they often picture several buckets: stocks, bonds, real estate, alternatives, commodities and cash. This “cash” portion includes traditional bank deposits, but also many other instruments deemed “cash equivalents,” including short term CDs and investments in money market funds.

Until now, it has been generally reasonable to assume that money market funds are as good as cash. While they’re not covered by FDIC insurance, these funds tend to be liquid and their NAV, or net asset value per share, has been pegged at $1. However, yesterday’s new money market fund rules approved by the Securities and Exchange Commission bring into stark relief why money market funds are not “the same as cash.”

The SEC announced on July 23 new regulations governing how investors can get their money out of money market funds in the event of financial-markets turmoil. The rules allow some funds to put up barriers to redemptions under certain circumstances, according to The New York Times. That means investors could potentially lose access to their cash when they need it most.

What this means, in practice, is that investors should treat money market funds differently from cash as they think about liquidity. Before these new rules, investors could typically redeem their money-market fund shares at the end of each day. But if — in the event of market turmoil — it’s not possible to access these funds right away, that money is suddenly less available to the investor, and thus less valuable. It’s often precisely when markets are most troubled that cash becomes most valuable. Ask any investor who had excess cash lying around and bought the S&P 500 index when it fell below 700; today, the S&P 500 index stands just shy of 2000.

There are plenty of situations where an investor might choose to lock up money to get a more favorable return. CDs usually promise higher rates for a longer period. Private equity investments require much longer lock-ups, typically up to 12 years.

Money market funds are a different case. At current interest rates, these investments offer little to no return. Faced with these new regulations, investors may wonder why they must bear the risk of losing liquidity without being compensated by additional interest.

How to get around this problem? For investors who are looking to keep their money liquid, available, and FDIC-insured, savings accounts at leading online banks are a smart choice. These savings accounts can pay up to 0.90%, above the 0.11% average that U.S. savings accounts as a whole pay in interest and far more than the 0.01% offered by many money market funds at present.

For those investors compelled by the opportunity to earn higher returns on FDIC-insured bank deposits, MaxMyInterest offers a convenient platform to automatically manage multiple savings accounts to achieve greater FDIC protection and maximize interest income.

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