Talk about leaving money on the table
Year after year, Canadians invest in money market funds. Today there is still more than $31-billion invested in these funds.
Last year, the average money market fund returned 0.56%. Some of them returned 0.01%.
So, interest rates are terrible, 0.56% is better than nothing. What are we supposed to do?
Well, there is an easy answer. Set up a high-interest savings account that pays anywhere from 1.35% at ING up to 2.00% at smaller online credit unions like Achieva Financial.
If we apply the average return of 0.56% to the $31-billion and suggest that these assets could have earned 2.00%, the amount of interest simply handed to our largest financial institutions was $446-million. That is a lot of money to be giving away for no reason.
To be fair, not every dollar in money market funds would qualify for a 2.00% rate. Occasionally there are restrictions on the maximum amount of funds allowed in an account, or corporate accounts are paid a lower interest rate. Even if that $446-million number was cut by a third, $300-million is a lot of money to simply give away.
Of course, higher rates are nice, but if you only have a few thousand dollars, you aren’t missing out on very much. However, this issue of low rates is even more important for business owners, charities, condominium corporations and the like. Many corporate/institutional groups with large cash balances are earning next to 0% when they could be earning much more. For example, we work with Manulife Bank on these types of accounts and can get clients 1.40%.
You can get 1.80% from Ally Bank, which is now owned by Royal Bank of Canada. Time will tell if it maintains those types of rates over the long term, but it might be frustrating for those RBC investors who are told they must have $100,000 minimum for the privilege of earning 0.88% in their Premium Money Market fund, when anybody can get 1.80% through RBC’s Ally arm.
Bank of Nova Scotia recently bought ING, which pays a not particularly competitive 1.35%, but when compared to the $2-billion that Scotiabank’s customers put in their money market fund earning 0.35%, the 1.35% starts to look pretty darn nice. Imagine what would happen if that entire $2-billion went to ING. It would put $20-million more annually in clients’ pockets.
The Scrooge award is definitely earned by Bank of Montreal. BMO delivered a grand return of 0.05% on its money market fund to the $846-million that clients invested in it. As a result of its management fee of 1.06%, fundholders earned $423,000 of interest on their $846-million of assets, and BMO generated fee revenue of $8,967,600.
A free account with no service fees, paying higher interest, that you can access within two business days — it seems like a no-brainer. Many Canadians agree, and that is why this sector has grown so much, and the money market funds have seen a large decline in assets. Just remember that there is another $31billion of your money, sitting there underperforming.
Give yourself a holiday present. Give yourself more money.