How to stop your fund manager from feeding on your money

Don Roth, a 63-year-old aeronautical engineer from the Cincinnati area, says he may have to buy a new house soon, so he’s keeping 5% of his portfolio in cash, higher than usual. “It’s frustrating,” he said. “It sucks to see all that money sitting there earning absolutely nothing.”

With fund managers capturing nearly all of the extra revenue from the Federal Reserve’s 0.25 percentage point interest rate hike last month, you’ll need to take matters into your own hands to maximize the return on your money.

Money market funds its own high-quality short-term debt; They are looking for to maintain a stable price per share, generally as close to $1.00 as possible, and to pay dividends which should rise and fall to keep up with short-term interest rates.

Why, then, has almost all of the recent rate hike gone to asset managers rather than investors?

Fund companies charge around 0.25% to 0.5% per year to manage retail money market funds. With the Fed keeping interest rates near zero for most of the past decade, many money market funds could barely cover the cost of running them.

This left managers no choice but to not charge some or most of their fees. Otherwise, some of the funds would have produced less income than they incurred costs, resulting in negative returns for investors.

Asset management companies have therefore been subsidizing these funds with fee waivers for years. Look, for example, at Dreyfus Government Cash Management, with $115 billion in assets. According to a recent revelationmanager of this fund, a unit of Bank of New York Mellon Corp.

waived or refunded fees totaling $91 million between 2019 and 2021.

So to some extent, it’s only fair that the recent rise in yields went into the pockets of asset managers (assuming the expenses weren’t too high to begin with). Fund companies provide a service and expect to be paid after years of waiving normal fees.

To put it bluntly, “the big dog has to eat first,” says Peter Crane, president of Crane Data, a company that monitors cash and other short-term investments.

Here’s how big those subsidies have been: In March, as rates rose, Crane estimates that fund managers were taking total fees of about $10.3 billion a year. By the end of 2021, with rates so low that managers had to waive fees, their take was only around $4 billion a year.

Some companies that manage money market funds might even try to recoup past fees they couldn’t collect when rates were low. An information document of Columbia Management Investment Advisers, a unit of Ameriprise Financial Inc.,

suggests that the company may think it can. A Columbia spokeswoman declined to comment, although Mr Crane doubts any company would dare attempt such a recovery.

In any case, monetary funds are already in the money for thembut not yet for you. The average return of the Crane 100 index of the 100 largest funds was 0.20% this week. That’s a hair of 0.15% as of March 31 and an improvement from its pathetic 0.02% at the end of February, but still well below this week’s performance on One-month and three-month US Treasuries at 0.33% and 0.83%, respectively.

Silver Funds offer great convenience, with check writing, free transfers, and the ability to withdraw your money whenever you want. And if, as expected, the Fed raises rates by 0.5 percentage points next month, more of the yield should ultimately flow to most investors.

But with managers still recouping their lost fees on these funds, “it’s kind of like you have to start the race all over again,” says Douglas Beck, president of Tailwind Wealth Management in Hingham, Mass., and a former fixed-income product. . executive at Fidelity Investments. “You are penalized and must return to the starting line after the shot has already been fired.”

So give yourself a rate hike by looking beyond money market funds.

Websites such as DepositAccounts.com and Bankrate.com can direct you to online savings accounts that pay 0.5% and above.

You can also buy treasury bills directly from the government at TreasuryDirect.gov. The website is outdated and clunky, but once you get the hang of it, you can buy a new T-bill every month. That way, you’ll always have one maturing every 30 days, keeping you liquid and earning more on the latest treasuries as rates rise. You can also arrange to automatically reinvest the proceeds in new treasury bills as each matures.

After decades of interest rate cuts, Beck says, “such inertia has built up that people have become complacent.”

But you don’t have to be. At a time when returns on other assets might be lower than in the past, it pays to get the most out of your money.

Write to Jason Zweig at [email protected]