The much-anticipated capitulation in money market fund fees has begun.
TD Ameritrade Holding Corp. last week said it began waiving fees on at least one of its funds in December and will likely reduce or eliminate fees for the vast majority of its other money market funds over the next few months to avoid a zero or negative return for investors.
"I think [it] is the right thing to do," assuming that interest rates don't rise, William Gerber, TD Ameritrade's chief financial officer, said in a conference call with analysts last Tuesday.
The Omaha, Neb.-based discount broker, which also offers custody services to independent advisers, has about $30 billion of assets in money market funds. Almost 90% sits in funds investing in Treasuries or other government securities that have low-single-digit yields, a spokeswoman said.
Fredric Tomczyk, chief executive of TD Ameritrade, said last week that its broker-dealer doesn't directly manage the money market funds it offers, and may begin encouraging its advisers to sweep client funds into Federal Deposit Insurance Corp.-insured bank accounts, which are safer than money market funds and provide equal or better yields.
Advisers, already on the defensive over negative returns in their clients' equity and fixed-income portfolios, would find themselves in the awkward position of explaining how management and distribution fees can turn positive returns into losses.
Mindful of the problem, Federated Investors Inc. last week disclosed that it took a charge of $5.6 million for voluntary fee waivers last quarter, including $3.4 million on money market funds "in order to maintain zero to positive net yields."
The Pittsburgh-based mutual fund firm said additional fee waivers to avoid flat to negative returns "are expected to increase, and these increases could be significant."
Charles Schwab & Co. Inc. this month joined several fund suppliers that closed low-yielding Treasury funds to new investments. Schwab held $30.5 billion in its Treasury Money Fund alone, but to date has not waived fees in it or other money market funds, a spokeswoman at the San Francisco-based company said.
However, Schwab changed the Treasury fund's charter to allow it to invest up to 20% of its assets in certain non-Treasury investments, including mortgage-backed securities from Fannie Mae of Washington and Freddie Mac of McLean, Va., and others that are guaranteed under the FDIC's new Temporary Liquidity Guarantee Program. The investments could yield more than Treasuries, helping Schwab avoid losing fee income.
"You will see more waivers because the money markets are still bottoming," said Peter Crane, whose Crane Data LLC in Westboro, Mass., offers services to the money market industry. But he doesn't expect similar moves in the larger Treasury funds, where rates are beginning to rise.
Mr. Crane also said that funds like Schwab's that have changed their Treasury investment options have not been buying the alternative investments because they are not tax-exempt at state levels. "If the revenue pressure becomes acute, I assume they would begin those investments as a last resort," he said, though he noted that a hefty pipeline of new Treasury securities is likely to increase yields.
In spite of the recent waivers and alternatives, the money market industry is hardly on its knees, Mr. Crane said. U.S. money market funds generate $15 billion of revenue, with government funds representing about 10% of the whole.
"If rates stay low for another year, it may cost a couple of hundred million dollars," Mr. Crane said. "That's certainly not welcome in this environment, but it's not going to send fund firms or investors running and screaming out of the Treasury sector."
At TD Ameritrade, however, fees are being hit in several areas, Mr. Tomczyk said. In addition to forgoing money market revenue, the company is collecting lower 12(b)-1 asset-based sales fees from fund companies because of a "significant" drop in the value of funds in recent months, he said. Fees from money market funds and mutual funds represent about 85% of TD Ameritrade's fee-based revenue, which totaled $79.2 billion in the last three months of 2008.
On the positive side, Mr. Tomczyk said the discount brokerage firm's core businesses are strong, while its cash capital is thriving. TD Ameritrade ended its last quarter with $1.3 billion of cash, up from $788 million at the beginning of October, largely because to regulatory capital needs were lower due to declining margin balances. In addition to using the cash for possible acquisitions, the company is keeping it as "dry powder" in case it has to redeem auction rate securities from advisers and other clients, he said.
TD Ameritrade, like many other midtier brokers that sold auction rates on the secondary markets, has not entered settlements like those that regulators have demanded of firms such as The Goldman Sachs Group Inc. and Merrill Lynch & Co. Inc. that sponsored the auctions. That has stranded investors who haven't been able to cash in the securities, which were marketed as cash equivalents. TD Ameritrade is in "ongoing discussions" with regulators about auction rates, Mr. Tomczyk said.
Mary Schapiro, who led the Financial Industry Regulatory Authority Inc. of New York and Washington before she was confirmed by the Senate last week as chairman of the Securities and Exchange Commission, asked the Department of the Treasury last year to lend funds from the Troubled Asset Relief Program to help midsize brokerage firms redeem auction rate securities. The request went unanswered, she said at the time.
E-mail Jed Horowitz at firstname.lastname@example.org.