Financial advisor Edward Silversmith says that when he has a client who may need cash quickly but still wants returns, money markets are not a bad place to look.
His first preference for reliable yields remains Treasury bills. But since government bonds tie up money for a set period of time, they're not always the best fit for clients who might need funds quickly.
Silversmith said his firm, Wealth Enhancement Group in Pittsford, New York, will sometimes direct clients to Charles Schwab's Schwab Value Advantage Money Fund, now offering a 7-day yield of 4.96% That's appealing at a time when inflation is running at a year-over-year rate of 3%.
He and other financial advisors recognize a weakness in money market funds: Unlike bank deposits, they are not guaranteed up to a certain amount by the federal government. Silversmith said he's hopeful money-market reforms adopted by
"I think it's probably at least the safe play," Silversmith said. "Everybody has learned how fast money can move out of these things, and a little bit more liquidity for everybody really isn't a bad thing."
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The SEC's new regulations, passed in a 3-2 vote in a virtual meeting, are meant to provide liquidity and keep investors from fleeing the funds in times of economic stress. The new rules seek to make the funds safer by requiring they invest at least 25% of their holdings in bonds and other assets that mature in one day, up from the current minimum of 10%. They'll also have to hold at least 50% of their investments in assets that mature within a week, up from the current 30% requirement.
The regulation separately calls on certain money market funds — mainly funds used by institutional investors — to impose fees on withdrawals when their net daily redemptions exceed 5% of their net value.
Money markets differ from banks not only in lacking government protection of up to $250,000 from the Federal Deposit Insurance Corporation. They also don't fall under capital reserve requirements that help prevent banks from running out of cash during times of heavy outflows.
Katherine Edwards, an advisor at MainStreet Financial Planning who works remotely in the Nashville area, said she rarely directs clients to money markets these days, but not because of concerns about their stability. Instead, it's that investors can find returns that are just as good — or nearly as good — in high-yield savings accounts.
And unlike money markets, these high-yield accounts are backed by the FDIC. She said she thinks the SEC's new rules could help make the funds more appealing.
"But it's not that I wouldn't necessarily recommend money markets now," Edwards said. "There's nothing wrong with them."
Money markets
But recent history has shown they come with risks. Regulators have had to step in twice in recent times — once in 2008 and once in 2020 — to backstop the money markets after outflows threatened to push individual funds to the brink of collapse. The rules the SEC adopted this week are regulators' latest attempt to bring greater stability to the system.
"Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress," SEC Chairman Gary Gensler said
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Others said the SEC should have gone further. Stephen Hall, the legal director and securities specialist at the market reform advocate Better Markets, said he'd have liked to see money markets have capital reserve requirements similar to those applying to banks. Those reserves are meant to ensure banks have a shield against default should a large number of depositors take their money out at the same time.
Without similar reserve requirements, money market investors are left "to fend for themselves," Hall said in a statement.
"Again, in both 2008 and 2020, U.S. taxpayers had to provide the 'capital buffer' with trillions of dollars' worth of backstops and liquidity assistance to prevent (money markets) from collapsing," he added.
The latest changes to money-market rules follow two other rounds of reform. In 2010, the SEC required that the funds undergo so-called stress testing designed to give investors information about their liquidity and tighten limits on the amount of low-quality assets they can hold. Roughly four years later, the commission allowed the funds to suspend redemptions when their liquidity measures fell below certain levels.
Critics said that last change had the opposite effect of what was intended. Rather than discourage runs, money markets' ability to suspend withdrawals gave investors an incentive to take their money out as quickly as possible during times of stress to avoid losing access.
Jamie Gershkow, a New York-based partner at Stradley Ronon and a member of the firm's investment management department, said the rule allowing redemptions to be cut off suddenly contributed to the volatility seen in 2020 and was scrapped as part of the new rules the SEC adopted on Wednesday.
"That should help increase the resiliency of these retail money market funds," she said.
