Despite the market's latest bout of volatility, the local bank is still no fit place for an investor's money, according to financial planners.
It's not as though the money is rushing in: Bank savings deposits have grown at an annual rate of just 11.1 percent over the past three years. But even that is more than advisers would like.Even reserve assets that need to be easily accessible shouldn't go into the bank, they argue. Instead, that money belongs in money market mutual funds.
Whether on their own or at the behest of planners, investors are obeying that precept: Money market fund deposits have grown at an annual rate of 17.9 percent over the past three years, according to IBC Financial Data. And during the stock market's recent shakiness, the flows have been particularly strong. All money market funds netted $45.4 billion in the last four weeks, compared with $29 billion a year earlier.
Still, billions of dollars continue to build up in bank accounts and money market deposit accounts, which in general have lower interest rates than money market funds.
"We're not big fans of banks simply because of the spreads in yield," said Marjorie Fox, a financial planner in Great Falls, Va. "We work hard to have clients move reserve funds from a bank to money market fund."
The difference in yield even over a few years could sting an investor. Banks' money market deposit accounts, usually their best interest-earners other than CDs, pay only 2.53 percent on average. That's slim compared with the 5.12 percent average for money market funds offered through mutual fund companies.
If an investor stashed $10,000 in the bank for three years at 2.53 percent, it would earn about $778; put in money market fund at 5.12 percent, it would generate $1,616.
But the larger issue for some investors is protection. Bank accounts, unlike money market funds, are insured up to $100,000 by the Federal Deposit Insurance Corp., which is backed by the federal government.
When confronted with this client objection, a planner must educate and advise, said Sheryl Garrett, a fee-only financial planner in Overland Park, Kan.
"There have been defaults in the money market world, but I tend to use money market funds and savings accounts as one in the same," she said. "The tiny amount of risk to own a quality money market fund is insignificant compared with the additional returns."