The end of money market funds?

Money market funds (MMFs) may be about to become history. No, it’s not due to years of low interest rates that have resulted in returns so small that you need a microscope to find them. Rather, the demise of MMFs may come about because for the first time there is real competition for the cash-parking business. The source: high-interest savings accounts.

Of course, there is nothing new about high-interest accounts as such. They have been around for several years. But now some of the companies that provide them are aggressively going after the mutual funds market and offering incentives to advisors to switch their clients over from MMFs.

I was tipped off to this recently when I had a conversation with one of my brokers about what to do with a large amount of cash in my account as a result of some profit-taking. I thought he would suggest putting it into his company’s in-house money fund. Instead, he promoted Altamira’s Cash Performer, a high-interest account that currently pays 3.5 per cent interest. By way of comparison, Altamira T-Bill Fund, one of the best MMFs out there in my opinion, earned 2.6 per cent for investors over th12 months to March 31.

Intrigued by the broker’s suggestion, I dug deeper and learned that Altamira pays a 0.25 per cent annual trailer fee on Cash Performer, even though it is not technically a mutual fund. It turns out that some of the other providers of high-interest accounts also pay trailer fees to encourage more business from advisors and these incentives are starting to have an impact.

The stakes are potentially huge. According to the Investment Funds Institute of Canada, we collectively had almost $42 billion socked away in Canadian dollar money funds at the end of March with another $1.9 billion in foreign MMFs (mainly U.S. dollars). That’s a big pot! The real surprise is that, until now, no one has stepped up to attempt to woo away some of this business. Now that seems to be changing.

The mutual fund companies should be worried. Many charge outrageously high fees for their MMFs and have been getting away with it. In fact, some are outrageously high, for example 1.85 per cent for the Acuity Money Market Fund. Some segregated funds are even worse, in several cases exceeding 2 per cent. That leaves virtually nothing for investors.

My view is that any money market fund with an MER of greater than 0.5 per cent is charging too much. In reality, the only fund that comes in under 0.5 per cent which is available to the general public and has a reasonable initial investment requirement is Altamira T-Bill.

So this apple is ripe for plucking and it appears the process has started. If the fund companies don’t respond by lowering fees quickly and dramatically, the MMF may be on a path to oblivion.