The Wall Street Journal posted an article titled, "Wealth Management Has a $3 Trillion Problem: Investors Are Keeping Too Much Cash." Subtitled, "Advisers are pitching bonds and other investments, but many prefer to keep cash in money-market funds," it tells us, "Since Don Ross retired as an airline pilot a decade ago, all the financial planners he has spoken with have wanted him to invest his cash. He isn't sold. He is keeping 85% of his portfolio in stocks and the rest in a money-market fund yielding 3.62%. Ross looked at historical bear markets and determined they typically don't last longer than three years. He keeps enough of his portfolio in cash to comfortably get himself through that period, and he sells stocks when he needs to replenish his cash pile."
The piece says, "He is among the investors giving headaches to the money managers who want them to part ways with their cash. Individual investors are sitting on a mountain of it. There is over $3 trillion in retail money-market funds, hovering around a record high, according to the Investment Company Institute. (And that doesn't include the trillions of institutional dollars sitting in money-market funds.)"
It continues, "Assets flooded into these funds in 2022 when the Federal Reserve ended its policy of near-zero interest rates. Money-market yields rose above 5%. Rates have since fallen, but money-market funds, which now yield 3.49% on average, according to Crane Data, have retained their appeal. Now wealth and asset managers, eager to prove their worth and in many cases earn more fees, are trying to persuade investors to put it to work."
The WSJ explains, "The risk, they argue, is that the yield on cash won't keep pace with inflation. Money-market yields are currently right about at the rate of inflation. Many advisers are pitching alternatives, including corporate bonds, municipal bonds and more exotic offerings such as buffer exchange-traded funds and private credit."
It adds, "Todd Stankiewicz, chief investment officer of wealth manager Sykon Capital, said he devotes a significant amount of time to getting clients to consider alternatives to cash amid lackluster bond performance.... Still, he acknowledged, if the stock market underperforms the yield on a money-market fund, investors would have been better off staying put. Ross, the former airline pilot, says he is wary of complex investments with high fees. He also doesn't like bonds, noting that the 10-year annualized return on Vanguard's total bond market ETF is just over 1%.... 'When I look at somebody saying, 'you need to get back into the market,' the first thing I'm asking is: Why are they saying that?' he said."
In related news, website RIA Biz claims in a piece, "Schwab is nixing FDIC backing on brokerage sweep cash as soon as Sept. 8 by moving it all under SIPC -- with clear drawbacks for investors, say analysts."
They write, "Charles Schwab & Co. just gave notice that investors will no longer get FDIC protection for sweep cash in their brokerage accounts as part of a conversion that happens between Sept. 8 and Dec. 7. [Note: We couldn't find any notices from Schwab on this.] The Westlake, Texas firm informed its millions of investors today (Aug. 8) that sweep cash will remain in brokerage accounts, where it will be insured by the Securities Investor Protection Corporation (SIPC)."
It continues, "No fees aside, SIPC coverage is not the same as FDIC insurance, says Ben Cruikshank, President & Chief Commercial Officer at Flourish Financial, which builds custom solutions for advisors. 'SIPC is unquestionably a lower level of protection than FDIC,' he says by email. 'FDIC is the gold standard.' Schwab offered no explanation for the change, and did not respond to a query for comment."
The article says, "But Will Trout, senior analyst with Datos Insights, says the move makes sense because it may improve the profitability of the company by lowering costs. 'Schwab is making this change to improve its own economics by holding cash directly as a broker-dealer obligation rather than depositing it at partner banks, which lowers the firm's cost of capital and borrowing costs.,' he says by email."
They quote, "'Schwab One Interest is not a bank account, is not a money market fund, and is not FDIC-insured,' it states. 'Cash held in the Schwab One Interest feature is eligible for up to $250,000 in SIPC protection. SIPC provides up to $500,000 of protection for brokerage accounts held in each separate capacity (e.g., individual or joint tenant), with a limit of $250,000 for claims of uninvested cash balances.... Unlike the FDIC, SIPC does not provide blanket coverage.'"
The update adds, "If history is a guide, Schwab's competitors could follow with like moves to stay competitive on economics though that apparently has not happened yet. 'This appears to be Schwab-specific; Fidelity and Pershing have not announced similar moves,' Trout says. Fidelity declined to comment in response to a query asking for a reaction to Schwab's change and whether it had a similar change in the works."
Finally, it concludes, "In a footnote of the notification, Schwab makes the SIPC difference explicit: 'Brokerage products and services (including unswept or intra-day cash, net credit or debit balances, and money market funds) offered by Charles Schwab & Co., Inc. (Member SIPC) are not deposits or obligations of the Program Banks, are subject to investment risk, are not FDIC insured, may lose value, and are not Program Bank-guaranteed.'"
