One of those boring financial topics is in the news again: money markets. If your clients’ eyes glaze over at the mere mention of money markets, you may have to remind them that their day in the sun now is due to the dark days in late 2008 when these musty, safe investments were suddenly viewed as risky. Or, if this resonates more with them, back when they frantically called you every hour on the hour and left profane messages.

Last week, the President’s Working Group on Financial Markets issued a report outlining several options to make this $2.8 trillion market safer. (For comparison, if that much money constituted the output of a country, it would be the fifth-biggest economy in the world.)

One option from the report, which the industry is not lining up to support, involves a floating net asset value. This would allow a fund’s share price to fluctuate.

And in a very broadminded, philosophical way, this would seem to make sense. During the meltdown, it was common to hear a refrain of “I just don’t understand what’s going on.” And that came from professional investors and strategists no less.

So if investors crave transparency and clarity on the value of their holdings, a floating NAV would provide that.

But in the real world, that may not be such a practical approach. While it would offer more information on the value of the investment, it would also require much more monitoring and more allocation changes. And this would be, ironically, in the very part of their portfolios clients expected to be safe and sound.

And any clients who specifically did not want to put principal at risk in this part of their portfolios would have an immediate problem because a floating rate means there is now risk.

Naysayers also will point out that the closest current example of a floating rate NAV fund is an ultra-short bond fund. And those did not exactly reward investors during the meltdown with their higher transparency.

Another option from the report entails a new “liquidity bank” to be funded by the industry. A couple of industry insiders I spoke to said this was an interesting option, but they both expressed concern about the costs involved. If it’s too pricey, it will cause people to look elsewhere, they said.

There is also the possibility of having some sort of two-tiered system, where part of the money market would be under a new set of rules, and part under the current system.

The main issue to keep in mind when you talk to clients is what exactly they expect and need from this portion of their portfolio. If safety and liquidity are their main concerns, then yield isn’t the driving force behind them. So even if the costs of these funds were to increase, depending on the option that’s implemented, keep them focused on the bigger picture. That is, if safety was the main objective, the funds will still offer that safety.

On the flip side, if they are already focused on the safety issue, and are dead set on the idea of “dollar in/dollar out,” they may have to come to terms with a sudden injection of new risk (if the floating-rate option is the one that gains traction.)

This whole thing could take years to play out. But in the meantime, you should be talking to clients on their expectations and what they’re willing to concede to achieve their overall goals.

And if they get antsy about the changes in whatever form they take, just remind them of the nerve-wracking days in 2008. Nobody wants to go back to the frantic calls every hour.


Register or login for access to this item and much more

All On Wall Street content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access