Helping Clients Better Manage Cash Can Expand Relationships

The differences are largely structural: MMFs are diversified portfolios of highly liquid assets; bank deposits are unsecured liabilities on the banks’ balance sheets. Deposit rates are dictated entirely by individual banks. Depositors’ yield potential is inherently limited by the banks’ balance sheet and funding needs.

Most banks are flush with cash, thanks in part to Fed liquidity, so they do not need depositors’ money. This gives them little or no incentive to raise the interest rates they offer.

This is nothing new — the last time the Fed peaked, in April 2019, interest paid on national jumbo deposits (greater than $100,000, 3-month CD) was 0.25% versus an average MMF 7-day net yield of 2.15%.

Banks also have been turning away deposits because of how expensive they are from a capital cost perspective. This is unlikely to meaningfully change soon.

As market prices continue to adjust to reflect new information, investors who passively own Treasury securities outright are more likely to either incur losses or miss yield opportunities if they do not actively manage their duration.

Run by active risk managers, most MMFs invest in securities issued by U.S. Government agencies, including the Federal Home Loan Bank, Fannie Mae and Freddie Mac, but the great bulk is usually in Treasuries. Some funds rely on Treasuries exclusively.

Most of these government MMFs offer stable NAVs, so they carry no mark-to-market risk for clients; daily liquidity, allowing for quick exits; and perhaps a small extra return. Investors typically pay a single management fee.

There are no entry or exit fees. As MMFs invest across maturities, they may offer yields exceeding policy rates or individual securities.

MMFs are easy to use, easy to get into, easy to get out of, and offer a fair market rate of return.

In these inflationary times, investors seeking to capitalize on increases in global central banks’ policy rates may consider putting their cash to work in MMFs or higher yielding bank savings accounts, although MMFs offer far more flexibility and many higher yielding bank accounts limit size and transactions.

For financial advisors, showing clients you can add value for the last basis point through superior cash management sends the message that you apply the same level of care to the entire portfolio. This is a terrific opportunity to remind clients of your value-add in coming months.

Ashish Shah is managing director, chief investment officer, Public Investments, of Goldman Sachs Asset Management.