More than 2,000 financial advisors of several of the largest firms had clients that had placed their cash in The Reserve Funds. If you know one of those advisors (or one of their clients), you already know that all money market funds are not alike and some more than others run the risk of breaking the buck like The Reserve Funds did. You also know that if a client's funds get trapped in a broken-buck fund, it may take months to get their money out, and when you do, it won't be the full amount.

Your clients look to you to deliver value on all of the assets they place under your management. With cash averaging about 20% of total client assets, this asset class deserves as much attention as fixed income or equity, particularly now when money funds are delivering very low returns and quite a bit more risk than commonly believed.

Unfortunately, there are no established tools to guide the way. While the Security and Exchange Commission regulates what kinds of investments a money fund can hold, and what the mix of maturities of those investments must average out to be (average duration), nothing has been done so far to eliminate the risks that led to Reserve Funds' downfall, or some new ones that have cropped up since.

    Rating agencies never figured out that Lehman Brothers was about to go bankrupt and continued high enough credit ratings to warrant holding Lehman paper inside money funds, and many funds, not just Reserve, did so.

    Once Lehman went belly up, institutional investors reacted instantly on the first trading day after the news and redeemed their holdings, knowing by analysis of the fund's holdings that Reserve would be in trouble and have to either halt redemptions, return less than 100% of principal invested, or both. Nothing has yet been done to shelter retail investors from the consequences of institutional investors they share a fund with bolting and leaving the little guy to hold the bag.

Where To Turn
The money funds industry takes the position that there are no differences in risk between one money market fund and the next, and claim they are all safe. The thinking goes something like this: "There has only been one fund to break the buck in 30 years," etc. This thinking is false. More than 40 funds would have broken the buck but for voluntary purchase of bad assets by the fund parent company or a bailout like Temporary Treasury Department Guarantee. The SEC also allowed some funds to suspend normal accounting procedures to avoid reporting the buck breakage (allowed by special permission under the rules) but very rarely used until recently.

While the rating agencies, like Standard & Poor's, rate money market funds, the major thing they pay attention to is the credit quality of the fund's investments, which in turn have been previously rated by the rating agencies. It's hard to give the rating agencies good scores over the past year or two in seeing the recession, bank failures or company bankruptcies coming.

Morningstar, while providing information about money market fund yields, assets and other useful statistics, does not have any risk filter or other methodology for helping the financial advisor pick through the pile. With several hundred money funds to pick from, advisors have lots of choice but also a large pool to analyze for risk differentials.

The firm you work with is nearly certain to either operate a money market fund directly or in partnership, or to be receiving 12b-1 fees from preferred money market fund families. While the financial advisor is never required to use a proprietary or preferred fund, it is unusual (and to my knowledge never) for a brokerdealer to provide risk analysis of money funds to their employee or affiliated financial advisors.

Some Free Advice

Our firm, Heitman Financial Services Consulting, is building a Money Fund Risk Scorecard.We look at the holdings of all the major money funds and rank them based upon the riskiness of what they have invested in. In our opinion, you can reduce the risk of a fund breaking the buck or halting redemptions by looking at the following:

1.    The percentage of Treasury and Government securities to total fund assets. This information is published at least semiannually and usually quarterly by the fund.Some funds are 100% Government, but even prime money funds that can invest in commercial paper and CDs will normally hold some Treasuries or Governments as well. The higher the percentage of Govies and Treasuries, the lower the risk of buck breaking or redemption suspension.
2.    Are institutional investors allowed in the fund and if so in what percentage? If the answer is yes and more than 50%, your retail clients are heavily exposed to institutional runs like the one that sank The Reserve Funds. Funds like Vanguard have no institutional clients, but also pay no 12b-1 fees, making a difficult tradeoff. Edward Jones' advisors are fortunate because their funds have no institutional clients despite being operated jointly with Federated, which has a high exposure to institutional run risk.

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