Why advisors should ditch money market funds

(Originally published in Bond Buyer December 1, 2020)

Money market funds (MMFs) have long been a staple in brokerage accounts as a safe place to stash cash that’s not being invested. In light of the events of the past year, it’s time financial advisors and their clients re-examine this approach.

Historically, MMFs have been used to provide safety, liquidity, and yield. In today’s market, these funds now fall short on multiple fronts. The onset of the Federal Reserve’s zero interest rate policy has eroded the value proposition of MMFs considerably, to the point where several trillion dollars of MMFs are no longer an attractive option for individual investors.

To understand why, we must first examine the origins of MMFs. The idea was remarkably simple: help clients obtain a higher yield than bank accounts by buying short-term government securities. Pooled together, there were sufficient funds to actively trade in and out of these securities, picking up yield by taking slightly longer duration and a little bit more risk. With enough scale, a fund manager could be paid circa 0.15% in fees to select, buy, and sell these bonds, and investors could pick up higher yield through an instrument that looked pretty safe, given that the underlying securities were government bonds and other short-term paper. As long as all investors didn’t run for the exits at the same time, clients would be able to access funds the next-day, while earning yield that was higher than that offered by a brick-and-mortar bank account.

Of course, there’s rarely a free lunch in finance. This became painfully apparent during the financial crisis when the Reserve Primary Fund broke the buck. When investors sought liquidity from this MMF at the same time, the underlying securities had to be sold at a discount and investors lost principal when they couldn’t get back 100 cents on the dollar. While there have been few such failures of MMFs relative to the trillions of dollars in these funds over the past few decades, taking on the risk of any loss of principal only makes sense if you’re able to pick up additional yield that justifies it. Today, that risk-reward equation doesn’t hold, since MMFs yield substantially less than FDIC-insured online savings accounts.

Many Fed watchers expect the current near-zero rate environment – which has driven down MMF yields – will persist for several years. One need only look at the yield curve to conclude that low-interest rates will be with us for a while. The recovery of our economy – and thus, rate policy – will depend significantly on the course of the pandemic.

The most prominent government MMFs yield only five basis points (0.05%), and while prime funds may yield slightly more, they also carry more risk. Under the Securities and Exchange Commission’s new rules promulgated following the financial crisis, retail-held prime funds can be subject to 10-day redemption gates and redemption penalties of 1-2% in periods of financial stress, making it potentially even harder to access cash when needed. For clients seeking safety, liquidity and yield there are far better options than MMFs.

What’s a much simpler solution for keeping client cash safe? Plain vanilla FDIC-insured savings accounts. Today’s leading online banks – which are able to pay higher yield by eschewing brick-and-mortar branches – are delivering yields of 0.40% to 0.60%. Through platforms like MaxMyInterest, some are even able to pay rates as high as 0.85% — a full 80 basis point premium over a government money market fund. With the funds sitting in FDIC-insured and same-day liquid accounts, this incremental yield comes with greater safety and liquidity as compared to an MMF.

Sadly, institutional investors can’t easily benefit from FDIC insurance coverage in scale and so will remain beholden to MMFs for the time being. But, for retail investors who hold six-to-seven figures in cash, FDIC-insured bank accounts can deliver dramatically higher yield than money market funds.

Given the recent economic challenges and market volatility, financial advisors are looking for safer, higher-yielding options for their clients’ cash – and are turning to one that was previously overlooked: online saving accounts. Advisors would be smart to take note of advisor-oriented solutions that can help clients maintain a cash cushion during times of financial stress while earning higher yield along the way.

Take a look at your clients’ brokerage statements. If they’re sitting in MMFs or earning 0.01% on a broker’s cash sweep, it may be time to reevaluate your strategy for cash. Your clients will thank you.

When You Take Cost out of a System, Customers Win

Image by Megan Rexazin from Pixabay 

When we started MaxMyInterest seven years ago, in the wake of the financial crisis, the premise was simple: how can we help individual investors keep their cash safer while earning more at the same time?

The safe part was easy — hold your cash directly, in your own name, in your own bank accounts, but spread it across multiple banks, so that you can obtain more FDIC insurance coverage. By avoiding brokered deposit systems or other gimmicks that promise high yield through obscure structures, you’d always know exactly where your cash was since it was always in your own bank accounts that you could access same-day if needed.

The ability to earn more was also pretty straightforward. It was 2013, and e-commerce was growing rapidly. It had become obvious to most that you could buy a book online for less than the in-store price because you weren’t paying for the costs of operating the store. A book is a commodity, and absent the costs of rent, air conditioning, etc., online stores could sell the book at a lower price and still earn the same profit, if not more.

Putting these two concepts together led to the creation of MaxMyInterest: a platform that would help you keep cash safer while earning more by leveraging the efficiencies of online banks. But we noticed one additional, often-overlooked factor: unlike a book that you purchase once, with a bank account, you’re really making a purchasing decision every single day. Because interest rates change, you don’t want to choose the highest yielding bank today, you want the highest-yielding bank every day.

So we took Max one step further: rather than try to pick banks at a single point in time, we made it easy to open multiple bank accounts at once. Max’s software then automatically helps you route your cash to whichever of your banks is willing to pay you the highest yield each month.

Along the way, we discovered yet another inefficiency in the market. Historically, banks have had to pay to acquire their customers. Even without branches, online banks still spend a fortune on advertising and click-through referral fees. The result: every dollar that banks spend on customer acquisition is a dollar less that they could pay you in interest.

As the Max platform grew, we found we were able to leverage the scale of our business to drive even more scale, arranging preferential rates and terms for our customers — rates that could only be found on the MaxMyInterest platform. Since Max doesn’t accept advertising, referral fees, or payments per deposit, banks are able to attract high-quality customers at lower cost. In turn, they can then afford to pay higher yields to Max customers. It’s a virtuous cycle that gets better as more and more customers discover Max.

As Max has grown, we’ve invested in making it even easier to open new bank accounts, so that as we add new banks to the platform, Max customers can open new accounts in as little as 20 seconds. No logins, passwords, or trial deposits; just a few clicks followed by near-instant approval.

Amidst the COVID-19 pandemic, where much uncertainty remains and interest rates are ultra-low, earning as much as possible on your cash while keeping it safe and liquid is as important as ever.

How the 2008 Financial Crisis led to a better way to manage cash

Maklay62 / Pixabay

(Originally published on ValueWalk April 28, 2020)

Mark Twain is reputed to have said that “history does not repeat itself, but it rhymes.” The events of the past few months have certainly conjured up many memories of the Financial Crisis, and for those following bank stocks, the emotional roller coaster of 2008-2009 feels all-too-present today. The fate of many of our nation’s banks may rest largely on how long our economic paralysis is sustained in support of the greater good of public health.

Bankers and research analysts agree that American banks are much better-capitalized than they were a dozen years ago and should be able to withstand several months of severe economic contraction. But if the economy were to remain largely shut for six months, absent a windfall of additional money-printing from the Fed, another financial crisis could ensue atop our existing humanitarian crisis.

With all this doom and gloom, there is a glimmer of hope. Like every other financial or humanitarian catastrophe to befall our modern age – World War I, The Great Depression, World War II, Black Monday, the collapse of Long Term Capital Management, the Dot-com bust, 9/11, and the most recent Financial Crisis  – the path downwards has been followed by an even more ebullient path upwards. The shape, timeline, and certainly of any future recovery is unknowable, but we can hold out hope that it will at least rhyme with the events of the past.

I’ve had the experience of living and working through several market dislocations. From each one, I’ve sought to learn how to extrapolate from relevant data and facts, and, perhaps more importantly, how to recognize and curtail emotions. While every investment brochure disclaims that “past performance is not indicative of future results,” as an investor, it’s important to learn from your own past performance and journal your mistakes. Only by dissecting your thought processes at the time – both rational and emotional – can you endeavor to make better decisions the next time you are faced with a similar set of facts and circumstances.

Online Banks: The Financial Crisis As Inspiration

I was stationed in Tokyo during the Financial Crisis, working as an investment banker for one of the largest American banks, which had recently acquired one of Japan’s largest brokerage firms. I arrived in August 2007, just after closing the last private equity-based capital raise that involved so-called “Toggle Notes,” where a borrower could elect whether to pay the interest it owed in cash or in-kind (i.e. more debt.) It was illustrative of just how favorable the capital markets had become for issuers – a sign of a raging bull market where seemingly nothing could go wrong.

As an analyst on Wall Street in the late 90s, I learned that the hallmark of the late stage of a bull market is when the market “climbs a wall of worry.” In other words, in spite of each piece of bad news that could befall the economy, stock market indices continue to march upwards. In addition to overly accommodating capital markets, several other more pedestrian warning signs were also present by the summer of 2007. The drivers who shuttled me home from the office late at night were increasingly talking about their stock market gains and the houses they were flipping for profit. In-flight magazines contained countless ads for hi-rise luxury condominium developments. Were these signs of a healthy economy where the rising tide lifts all boats, or a warning that the pace of wealth creation was unsustainable?

As 2007 progressed into 2008, the unsustainability of the bubble in asset prices became all-too-apparent, and banks began to fail. From 2008 through 2012, the FDIC closed a staggering 465 banks. To put this in context, in the five years prior to 2008, only ten banks had failed. The bank where I worked didn’t fare much better. Bearing witness, first-hand, to such a precipitous fall from grace taught me an important lesson in the fragility of banks. No matter how storied the name or how solid the marble that adorns its branch entrances, banks exist at the pleasure of investors and depositors’ willingness to extend credit in exchange for levered returns.

The Importance Of Keeping Cash Safe

In response to the Great Depression, President Roosevelt and Congress enacted the Banking Act of 1933, paving the way for the creation of the Federal Deposit Insurance Corporation (FDIC). When my bank’s share price hit $0.97 in March of 2009, it struck me that much of my cash held at that bank might be in peril. While the FDIC provides deposit insurance, that coverage is limited, and every dollar that you hold above the FDIC insurance cap makes you, in effect, an unsecured creditor of that bank. I realized that in order to keep cash safe, I needed a better solution.

I began researching options for cash. Many banks and brokerage firms offered brokered deposit solutions, where a bank takes your excess deposits and sells them to other banks. The pitch is that this helps you obtain increased FDIC coverage, and so you should feel safe keeping all of your funds at your home bank or brokerage account. But my research revealed several risks inherent in this system, as well as large conflicts of interest. If I was to ensure all my cash was safe and liquid, I needed a better solution.

The best thing I could think of was to open new bank accounts at multiple banks and diversify my holdings by spreading my cash across them. I’d hold each account in my own name, control how much was kept at each bank (to ensure all funds remained below the FDIC limit at each bank), and retain full same-day liquidity at each bank. Unlike brokered deposits, where you might not be fully insured if the broker sells your deposits to a bank where you already hold accounts, and where you could lose access to all your funds if your main bank goes under, with my strategy, I knew that I’d maintain full control, full liquidity, and full FDIC-insurance coverage.

Online Banks And Interest Rates

In 2009, online banking was still relatively nascent, but, it turned out, opening new accounts at online banks was much faster and easier than going into a bank branch. I opened accounts at several of the leading online banks, which also happened to offer higher interest rates than their brick-and-mortar peers, owing to their lower operating cost structure. Much like Amazon had figured out how to sell a textbook cheaper by eschewing physical stores, online banks applied this concept to banking, making it possible to earn a higher interest rate on FDIC-insured savings accounts.

Still, the online banks changed their rates with great frequency, and often when I logged in to check my balances, I found that interest rates had changed. It occurred to me that I could move funds from one bank to another to benefit from yet-higher interest rates. For the next three-and-a-half years, I found myself logging in each month, checking rates, and manually moving funds from bank to bank to obtain the highest yield while keeping all my funds FDIC-insured.

This strategy could be highly lucrative (effectively capturing a pure arbitrage in the market for bank deposits) but also a huge time sink. There had to be a better way. How could I automate this process, so that my money could continue to earn the highest yields possible without my having to lift a finger? And if I could find a way to automate the management of my own cash, why couldn’t I open up this same strategy to anyone else who wanted to simultaneously earn higher yields with less risk?

Online Banks: Conclusion

The result: I created my own automated cash management platform – MaxMyInterest.com. Seven years and three patents later, Max is now the highest-yielding cash management solution in the United States, used by financial advisors at thousands of wealth management firms with more than $1 trillion of assets under management. With a top yield of 1.71%, Max stands above all other cash options offered by banks and brokerage firms – yet, the core premise remains the same as it was back in 2009: deliver the best yields, fully FDIC-insured, with same-day liquidity and no conflicts of interest.

While it may be difficult to envision now, the COVID-19 crisis shall too pass. And, if history does indeed rhyme, in its wake American ingenuity and determination will likely push our economy and financial markets yet higher – although the recovery may be long and uneven. As an investor, your appetite for risk may again increase, too. But for the portion of your portfolio that remains in cash, you should remain as protected and earn as much as possible.

Start Your Engines: Ultra-Fast Account Opening and Linking with Max

Account opening and linking is racecar-fast.

Get your stopwatch: the race to intelligent cash management just accelerated.

Max and UFB Direct, an online-banking brand of BofI Federal Bank, have just launched the industry’s fastest account-opening and linking process. It now takes just minutes to open a new Max-linked UFB Direct online savings account.

How is this possible? In partnership with BofI, Max developed new technology that allows the process to go much faster than the usual procedures for opening an account at an online bank.

What this means for Max members: it’s now possible to visit the Max website, apply for a new UFB Direct account, link it to Max, and start optimizing your cash all within minutes.

Financial advisors who use Max can also help their clients open UFB Direct accounts right on the Max site. The new, streamlined linking process means it’s faster than ever to start earning more on cash, FDIC-insured.

We’ve heard from financial advisors that they would like to add clients to the Max platform as quickly and with as little friction as possible. That’s why we made it possible to pre-onboard clients with one click from advisors’ CRM systems. Now, with rapid account opening and linking, clients can get a savings account set up quickly and can start their first optimization right away.

Why does speed matter? Because every moment counts — not just because time is valuable, but also because the power of cash optimization can start working sooner.

Learn more about Max’s intelligent cash management services for individuals, financial advisors, and businesses, nonprofits, and institutions, or contact us with questions: member.services@maxmyinterest.com.

 

3 Ways to Maximize Your Company’s Cash

Cash should be working its hardest for you. That’s especially important for corporate, foundation, and nonprofit cash. This money has to be kept safe — it’s needed for payroll, ongoing expenses, or acquisitions — so it can’t be invested in risky securities. In today’s low-rate environment, it can be tough to find a safe place to keep cash that allows it to earn interest.

Here are three ways treasurers can maximize both safety and yield.

  • Online savings accounts

Some online banks offer commercial accounts that yield more than what your brick-and-mortar bank pays. Be aware of FDIC insurance; choose a bank that is part of this government guarantee program, and make sure to keep your company’s account below the $250,000 limit.

While you won’t have a branch, online savings accounts make it simple to move money to and from your company’s regular checking account using ACH (likely the same way your company handles direct deposit for payroll). You can also arrange wire transfers if you need the money to move the same day.

  • CDs

A certificate of deposit, which pays a fixed return that’s usually higher the longer the term of the CD, is a safe place to keep your corporate cash — as long as it’s FDIC-insured. The drawback of a CD is that your money is typically locked up until the end of the term, and you may have to pay a fee to retrieve it early. This makes CD a less attractive option for businesses that need access to their cash.

  • Max for Business

We think companies should be able to earn a higher yield on their cash, FDIC-insured, just as individuals can by using Max. That’s why we’ve partnered with the American Deposit Management Co. to offer high-yield, FDIC-insured accounts to commercial, institutional, nonprofit, and trust customers. Through Max, ADM offers a preferred yield of 0.75% on balances up to $5 million, and a competitive yield on balances up to $50 million, all FDIC-insured. ADM clients include top U.S. corporations, municipalities, universities, public funds, non-profits and trusts.

Learn more about Max for Business or contact member.services@maxmyinterest.com.

 

The Role of Cash in Investor Portfolios

There’s global-volatility-roller-coasternothing like a little reprise of global market volatility to remind us that stocks don’t always go up.  That’s no reason to panic, of course, but sometimes it’s good to take a moment to reflect on portfolio theory and appreciate why most advisors don’t advocate a 100% allocation to equities.

Here at Max, we are not financial advisors, nor do we offer financial advice. Our goal is simply to help individual investors earn as much as possible on whatever portion of their portfolio that they — or their advisors — have chosen to hold in cash, while keeping it safe.  Today, our members are earning approximately 1.00% yield on their liquid cash, with FDIC insurance of up to $5 million per couple.  This works out to roughly 10x more interest income than paid in most savings or brokerage accounts and 20x more than most money market funds (which, it’s worth noting, are not insured.)

According to the most recent Capgemini/RBC Wealth Management World Wealth Report, 4.7 million high net worth households in North America — defined as those with more than $1 million of investable assets beyond their primary residence — are holding a collective $3.8 trillion dollars in cash & cash equivalents.  That works out to 23.7% of their portfolios.  Yet most financial advisors think that their clients are holding closer to 10% of their portfolios in cash. What accounts for the difference?  It seems as if Americans are more conservative than their financial advisors would seem to believe or advise.  They must be holding cash in other pockets — bank accounts, CDs, and money market funds outside the view of their advisors.

Why so much cash? There are several reasons. Some have to do with timing differences. A law firm partner might, for instance, receive monthly draws from the partnership, but pay estimated taxes quarterly. This results in a build up of cash that must be set aside to pay taxes. But if that cash is sitting in a regular checking or savings or brokerage account, it is likely dramatically under-earning its potential. Other households may be saving for a major purchase, such as a first or second home, or reserving funds against commitments made to invest in private equity funds. Again, cash set aside earning next to nothing creates a drag on the portfolio and represents a lost opportunity to earn on those funds.

Other investors are more strategic about their cash allocation. For some, it’s a hedge (amidst market volatility, where the values of stocks and bonds gyrate, it’s nice to have the comfort of an asset class that acts as a store of value.) For others, cash is an even more strategic asset – a form of dry powder, ready to be deployed when market opportunities present themselves.

For all the talk of cash being a zero return asset class, excess cash in a portfolio can also facilitate outsized gains. Looking back on the financial crisis of 2008-2009, an investor with cash on the sidelines, who was able to bravely dip a toe into the market while others were fearful, could have tripled her money simply by buying the S&P 500. Had that same investor been fully invested, she would have missed one of the greatest investment opportunities of our lifetimes. This past week’s market volatility again reminds us that having cash at the ready can mean the difference between fretting over falling share prices vs. capitalizing on opportunity.

Financial advisors should pay close attention to these statistics. Astute advisors know that they can deliver better financial advice if they have a truer picture of their clients’ assets, objectives, and risk tolerance. Bringing more of a client’s cash into view can help inform this discussion and lead to better investment outcomes. MaxMyInterest.com is one such tool that can be deployed to generate better returns for clients, both directly by way of higher yield, and indirectly, by assembling a pool of cash that’s ready to be deployed when volatility emerges.