TD to offer alternatives to money market funds

Innovative products would limit risk, execs say

Feb 8, 2009 @ 12:01 am

By Jed Horowitz

TD Ameritrade is readying a suite of alternatives to money market funds that it says will help financial advisers and its online brokerage clients deal with rock-bottom interest rates without assuming too much risk. The most innovative, in its way, is likely to be a throwback: a savings-account-like product from an FDIC-insured bank (likely an affiliate of Canada's TD Bank Financial Group, which owns 45% of Omaha, Neb.-based TD Ameritrade). The account would carry a slightly higher interest rate than money market funds, which are yielding 0.5% in interest, TD Ameritrade president and chief executive Fred Tomczyk said in an interview Thursday. The vehicle, which is still being vetted to meet regulatory and other standards, would have the disadvantage of offering very limited check-writing features. The account, which also could capture uninvested cash as a sweep vehicle, is a stab at resolving a vexing problem that juxtaposes an aching need by investors and advisers for yield against fears of taking on too much risk. Despite the slight yield advantage the product might give in today's climate, TD Ameritrade thinks that advisers and online investors should value the safety and liquidity of the insured product over yield. "You want to know about how we help you get yield," Mr. Tomczyk told registered investment advisers at the firm's annual conference in Las Vegas last week. "There are no magic formulas." He told the almost 900 RIAs at the conference that the firm will be introducing several new products and services across a range of risk. It will continue to include short-term bond funds and brokered certificates of deposit, but Mr. Tomczyk said TD Ameritrade will more try to educate investors to focus on capital preservation and to dispel the too commonly held notion that all money market mutual funds are guaranteed by the U.S. government. "For clients that want capital preservation and liquidity, the FDIC-insured product is the better one and safer one," he said.

TD Ameritrade was among the firms burned last year by marketing and investing in the Reserve Primary Fund, a money market mutual fund managed by The Reserve Management Co. Inc. of New York. About $586 million of money from TD Ameritrade and its clients were in the fund when it "broke the buck" last September, falling below the industry's implied guarantee of $1 a share. TD Ameritrade has since recovered about $468.4 million from The Reserve but also has paid out $35 million to clients to make good on their losses.

A spokesman at Charles Schwab Corp., the San Francisco-based discount broker that is the biggest custodian of RIA assets, said the company would not comment on whether it has plans for a savings-account-like sweep product. A spokesman at Fidelity Investments of Boston did not answer a request for comment, and a spokesman at Bank of New York Mellon's Jersey City, N.J.-based Pershing LLC division said the company will continue to offer a range of certificate-of-deposit products. The latter spokesman did not know if a savings account product is under consideration.

But the issue of flat to negative returns on money market funds that investors consider equivalent to cash has led TD Ameritrade, Schwab and other brokerage firms and fund sponsors to waive fees on some money market instruments, a decision Mr. Tomczyk said is "painful" to his firm's bottom line but necessary to keep the confidence of clients.

J. Thomas Bradley, president of Jersey City-based TD Ameritrade Institutional, said in an interview that he expects the new savings account product to be ready in 30 to 90 days.

Mr. Tomczyk and Mr. Bradley, meanwhile, are fretting over unusually high rates on CDs that are being offered from some competitors, including some financially shaky firms that recently became bank holding companies in order to receive government-backed assistance.

Schwab chief executive Walt Bettinger recently made similar comments, though none of the executives would name the competitors that have been drawing away deposits.

Banks run by GMAC Financial Services Inc. and E*Trade Financial Corp., both based in New York, are among those that have been offering one- to three-year CDs at rates from 2% to more than 3% and that are believed to be irking TD Ameritrade and Schwab. Mr. Tomczyk and Mr. Bradley did say they are annoyed about the high CD rates that Capital One Bank of McLean, Va., is offering through Seattle-based Costco, a supermarket warehouse.

TD Ameritrade will continue to offer some higher-rate CDs as Schwab and other custodians are doing, but executives said advisers who buy them shouldn't come running to complain if something goes wrong. "We will still have an open platform, but we can't back up all the Reserve Funds in the world," Mr. Bradley said.

E-mail Jed Horowitz at jhorowitz@investmentnews.com.

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