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Is Your Money Market Fund Safe?

How long has it been since you worried about the risks in your Money Market Funds? For me, it was all the way back in 2008!

I have recently had conversations with people much smarter and I about the potential for risk in Prime Money Market Funds.

It is not inappropriate to say that most Advisors and Investors consider their Money Market Funds to be 'safer' than risk assets...but are they?

What is a Prime Money Market Fund? 

"Prime Money Market Funds primarily invest in taxable short-term obligations issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper." (Schwab Website)

Note, the SEC has changed the rules governing Money Markets three times since 2008: 2010, 2014 and 2023

In an informative article from the law firm Ropes and Gray (Link), I learned about two terms from the 2023 SEC 'Release' that require more research:

  • Liquidity Fees

  • Reverse Distribution Mechanisms

Those are not terms an investor wants to read about when it comes to their "safe money."

It is fair to say Liquidity Fees and Reverse Distribution Mechanisms would not be used unless the markets were under heavy duress....which is exactly when you have the highest likelihood of needing those funds!

Are Treasury Money Market Funds the solution?

  • As the name suggests, they invest in the US Treasury Market.

  • Generally, you can get the same liquidity while only giving up a little yield.

  • In a Treasury Money Money Market prospectus I read recently it says: "The full faith and credit backing is the strongest backing offered by the U.S. government, and traditionally is considered by investors to be the highest degree of safety as far as the payment of principal and interest."

Sounds great, right?

In that very same the next says

"Based on the fund manager’s view of market conditions for U.S. Treasury securities, the fund may invest up to 20% of its net assets in: (i) obligations that are issued by the U.S. government, its agencies or instrumentalities, including obligations that are not fully guaranteed by the U.S. Treasury, such as those issued by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Home Loan Banks..."

Remember 2008? 

Is it worth the risk for your 'safe money?'

Probably...but is 'probably' good enough?

I prefer Treasury Ladders today.

Takeaways for Advisors:

  • Research any Prime Money Market Fund you are using and document your assessment in your Investment Committee Meeting.

  • Determine if a different Money Market Fund would be a better solution, but be sure to read the prospectus.

  • Call clients/prospects with money held away and offer to read the prospectus for them. It will open up some conversations. 

Takeaways for Investors:

  • Read the prospectus on any Money Market Fund. The name of the fund may not tell you the whole story. 


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