Repeal of the Glass-Steagall Act has opened the competitive floodgates among the banking, brokerage, and insurance industries, sparking an age where products and services are up for grabs. The Gramm-Leach-Bliley act, which repealed the Depression-era Glass-Steagall, has also created some new products, with one of the first out of the box being FDIC-insured money market accounts.
These accounts, also called “bank savings alternatives” or “sweep accounts,” are gaining popularity among consumers and are being offered by fund companies and wirehouses. Reserve Funds was first out of the gate in 1997 with its Reserve Insured Deposits, a product that it launched through its subsidiary, Reserve Management Corp., and that offers unlimited transactions. Next up was brokerage king Merrill Lynch with its Banking Advantage Program, which works as a default sweep from money market funds into its Cash Management Accounts. And this January, Salomon Smith Barney joined the pack with its Bank Deposit Program. Salomon, now a member of Citigroup, sweeps cash deposits into its interest-bearing, FDIC-insured money market accounts at up to six Citigroup-affiliated banks. TD Waterhouse’s Bank Money Market Account has been around for a couple of years. And Charles Schwab himself hinted at the Investment Company Institute’s (ICI) annual shindig earlier this year that his eponymous brokerage behemoth was mulling over FDIC-insured accounts.
To be sure, Merrill Lynch and other brokerage houses’ moves to offer a bank savings alternative isn’t solely an attempt to provide clients with an added product. It’s also a ploy to pull in those checking and savings accounts that have been out of their reach. It’s apparent that brokerage firms and wirehouses are taking a holistic view of wealthy Americans’ financial needs and adopting a panoply of services to accommodate them.
Advisors may not view FDIC-insured accounts as the hottest ticket in town, but having these bank savings alternatives on hand could offer a competitive boost. “Advisors have to be aware of the trend of bank savings alternatives because their customers may start asking for it,” says Peter Crane, managing editor of iMoneyNet, Inc.
The June issue of Money Market Insight, published by iMoneyNet, Inc., says growth in FDIC-insured money market accounts are threatening to overtake that of retail money market funds.
While advisors may want to get their hands on these bank savings alternatives to stay competitive, some advisors are feeling stymied by a poor choice in money market funds that are offered through wirehouse platforms. Most custodians only allow advisors to use the house money funds, where the choice usually varies from six to eight funds. Advisors are limited to custodians’ money funds because the custodian is able to earn 50, 60, or 70 basis points on them. “Their [money market] funds are profitable ventures for them,” says Lewis Altfest, with L.J. Altfest & Company, Inc., in New York.
Money market funds are “one of the few areas where you can’t use the competitiveness of the investment industry to your advantage,” says Larry Busch, a CFA with MR Weiser & Co. in New York. “You can’t go to the Morningstar database and find the best money market fund.”
Busch says he’d like to see the custodians “break out of the traditional mold” and put money market funds on a supermarket platform like mutual funds. “There needs to be a lot more competitiveness in the marketplace” in the money market fund area. “But because these firms derive so much revenue from the money market products, it will be difficult for them to break away from using their own product exclusively.” Custodians charge an expense ratio, or management fee, he says, so if they open up their offering to include other money funds they lose out on the management fee, and in some cases it’s as high as 1%.
Busch says he uses Schwab Institutional’s platform of money funds, and that Schwab’s array of fund categories matches those of other brokerage firms. But “it’s more the issue of choice,” he says. “Having the choice of using other money market funds would certainly be of interest. I know, for example, that Vanguard, Reserve Funds and Weiss, Peck & Greer all have very high-quality money market products, and it would be nice if I had the option of having that choice.”
Cash Is Still Valuable, If Not King
Bruce Bent II, president of New York-based Reserve Funds, the inventor of the money market fund, says he noticed advisors were feeling constrained by their money fund choices when they started flocking to Reserve Funds’ FDIC-insured account. “The lack of choice [in money market funds] became more apparent when we began offering more choice, with the FDIC-insured money market account being the most potent example of that. When we came out with the first FDIC-insured money market account, it was the advisors that really grabbed on to it with both hands right away.” He says advisors sought the FDIC-insured account to differentiate themselves in the market via a cash product and to justify their fees.