Does anybody have details on the way larger firms are implentmenting balance tiers on the rates that they pay to clients on money market funds?
Yes, they do it, and it's annoying to the client.
It's based, generally, on the value of the household assets. At my prior firm (big wirehouse) it looked something like this:
$0 to $50,000 - 1.5%
$50,000 to $100,000 - 2.25%
$100,000 to $250,000 - 2.75%
$250,000 to $500,000 - 3.0%
$500,000 to $1,000,00 - 3.25%
$1,000,000 to $2,500,000 - 3.5%
$2.5 million to $5 million - 3.75%
$5 million +... - full money market rate 4.0%
They could NOT offer a tiered money market rate for 1.) managed asset accounts, and 2.) retirement accounts. There was some ERISA law which did not allow this to happen. Managed accounts were paying advisory fees, so the firm thought they should receive the full money market rate.
My thoughts - It's wrong. Go to Schwab, Fidelity, TD Waterhouse and check out their rates across the board... it's always higher, and allows for 80% of the full money market rate to pass down and along to all clients regardless of asset size, and account type.
The problem was that the larger firms would make it increasingly difficult to transition client funds to another money market fund - saying, essentially, that the new fund will NOT be a sweep fund. Your client writes a check, you need to sell to cover the withdrawal if they have a shortfall in their 'sweep' money market balance.
It's total BS, and just another way for the firm to profit hoping the client will not be paying attention.
On the flip side, it can be helpful for encouraging clients to consolidate assets, for attracting larger clients (assuming that the top tiers pay more than typical money market funds), and it encourages me to chase larger clients. Better yet, at my B/D, it's FDIC insured to one million dollars per client.
I'm not universally happy with it, but I see some merits.
Money market tiering can certainly push assets out to a spot, like their
investment portfolio, which can be more profitable for the client. Which
can be a good thing. It can also make you consolidate investment assets,
as mentioned above.
The only thing that I’ve decided to work through during my recent
transition, is this…
1.) We aren’t a bank, and we aren’t bankers.
2.) Clients who are using you for money market funds, will bring more
headaches and issues than you will ever address on their investment
We decided to focus solely on the investment management side of our
business. We’ve told people to open checking accounts at the bank. It’s
our opinion that you can spend a tremendous amount of time worrying
about something which is totally non-investment related by becoming the
banker to your client.
So, ‘out’ with money market accounts, and ‘in’ with the investment
management. That’s what we are paid for…
Sorry for the second post.
On the flip side, it can be helpful for encouraging clients to consolidate assets, for attracting larger clients (assuming that the top tiers pay more than typical money market funds), and it encourages me to chase larger clients. Better yet, at my B/D, it’s FDIC insured to one million dollars per client.
I'm not universally happy with it, but I see some merits.[/quote]
Yes, and the rates on our lower tiers are far better than the wires....they really screw the smaller clients as usual.
Citibank online 5% money market. No minimum. I have had about 3,000,000 go out into that account in the past 6 months.
[quote=fritz]Citibank online 5% money market. No minimum. I have had about 3,000,000 go out into that account in the past 6 months. [/quote]
Wow...no wonder your posts are so down-in-the-mouth...
For your clients moving $100,000+ to this type account, be sure to recommend that they review the limits of FDIC insurance to make sure they're within the coverage area.
To counter this draining of assets, review some tax-free MM accounts and the rates being paid on them. Although the tax-free rates will certainly be lower than Citibank's, the "after-tax" or "money in pocket" rate could actually be higher.