Advisers seeking higher yields than money markets can offer
Many financial advisers aren't surprised that investors pulled $10 billion from money market funds in a recent week as they sought out higher-yielding options to park cash.
“More people today are looking at many other options than money markets, compared to even a few years ago,” said Tom Hoffman, an adviser with KAF Financial Advisors LLC, which manages about $500 million in assets.
Advisers are recommending that clients use savings accounts offered at online banks, short-term-bond funds, and even fixed accounts offered by most insurance companies because these options beat the near-zero rate money markets return these days.
Regulatory uncertainty also looms, as Securities and Exchange Commission Chairman Mary Schapiro has said the agency is working on a restructuring proposal that could float the net asset value of the money funds or require a buffer of funds to help protect investors from losses.
Assets in retail money market funds fell $10.11 billion, or 1.1%, to $892.79 billion during the one-week period through last Wednesday, according to the Investment Company Institute. Currently, there is about $2.58 trillion in money market funds, including retail and institutional assets.
“For firms still holding 10% to 20% or more in cash, it definitely makes sense to look for options outside of money markets,” said John Cox, an adviser with Kinsight LLC, which manages $500 million in assets.
His clients are mostly fully invested now, but for those who need cash equivalents, he's using ultrashort-term-bond funds such as the Pimco Short-Term Fund (PSHAX), which had a yield of 1% and a return of 1.71% through March.
Mr. Cox' firm also recommends clients use accounts offered by online banks, such as the ING Direct savings account, which offers a 0.8% yield. He recommends research options before sending clients out to just any online bank.
“We looked into several online banks that had decent yields but were rated too low by credit agencies,” Mr. Cox said.
The accounts are often used as emergency funds or for a retiree to use for monthly spending, he said.
Accounts at online banks typically pay a higher rate because they don't have the overhead costs of those with physical branches. Deposited funds into their accounts are still protected up to $250,000 by the Federal Deposit Insurance Corp.
Daniel Roe, chief investment officer at Budros Ruhlin & Roe Inc., which manages $1 billion in assets, said his firm uses insurance company fixed-annuity contracts that don't have loads, surrender charges, lockup periods or commissions.
The yields can be in the 1.75% to 2.5% range, and even with a 10% Internal Revenue Service penalty on interest withdrawn before age 59½, it's still a worthwhile option, he said.
“The net interest after penalty is still very attractive,” Mr. Roe said.
He declined to name the companies his firm uses for these, “as I have actually had the experience of a similar no-load fixed-annuity product being taken away due to being flooded with new assets,” he said.
With reporting by Jason Kephart
