INsider: Is Vanguard thinking about life after money funds?

Company said to be considering adding CDs, bank accounts to offerings; potential move not tied to SEC's reform push, exec says
SEP 18, 2012
Management at The Vanguard Group Inc. appears to be taking the possibility of money market reform seriously. The largest mutual fund manager in the world is considering adding banking services, such as FDIC-insured accounts and certificates of deposit, according to a report by Reuters. Those products would be ideal landing spots for any investor looking to exit Vanguard's $160 billion money market fund business — if the funds are forced to float their net asset value or add capital buffers, the two most likely reform proposals. Sean Hagerty, head of the Vanguard's portfolio review department, told Reuters the moves are not imminent and may not be introduced at all. He also denied that they are a direct result of the uncertain regulatory environment surrounding money market funds. But Daniel Wiener, chief executive of Adviser Investments and the author of a newsletter for Vanguard investors, told Reuters that Vanguard's mulling adding more banking services amounts to "a way to be prepared if the money market fund industry gets turned on its head." That indeed may happen to the industry. Money market funds have been under the Security and Exchange Commission's microscope since the financial crash, when the Primary Reserve Fund infamously “broke the buck” after Lehman Brothers Holdings Inc. collapsed. In May, Securities and Exchange Commission Chairman Mary Schapiro told attendees at the Investment Company Institute's general-membership meeting that she was intent on seeing further reform because money market funds still posed a systematic risk, despite protections that were put in place in 2010. “We have a legitimate concern over the risks posed by stable net asset values, and it's not hypothetical,” Ms. Schapiro said. “We saw what happened in 2008. It had a profound effect on broker-dealers and financial advisers.” Advisers increasingly have been steering clients away from money market funds for some time, less because of the potential risk of another fund's breaking the buck or seeing its net asset value fall below the advertised $1 share price and more because of the paltry yields. The average money market fund has a yield of just 3 basis points, according to iMoneyNet. If clients aren't going to realize any return on their money market fund, advisers prefer they put the money in bank accounts, which have the same paltry yields and the added bonus of insurance from the Federal Deposit Insurance Corp.

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