Investor advocacy organization FAIR Canada says that regulators, advisors and investors should all be paying more attention to the use of money market funds, which are producing little to no return in the current interest rate environment.

FAIR — the Canadian Foundation for Advancement of Investor Rights — issued a report on Thursday that examines the performance of Canadian money market funds, and concludes that most funds aren’t generating any sort of meaningful return for investors. In the second half of 2009, the report finds that the average Canadian fund earned just 0.02% after costs, before the impact of inflation and taxes.

Moreover, the report adds that since interest rates declined to almost zero in March 2009, most Canadian MMFs would be losing money had they not reduced their fees.

This lack of return represents $300 million to $500 million in possible lost interest, the report says.

“Few individual investors are aware that MMFs are now producing zero or even negative returns or that many bank savings accounts can produce better returns,” said Ermanno Pascutto, FAIR Canada’s executive director. “Canadians are missing out on potential interest income of $300 – $500 million by not shifting their funds into higher-yielding premium savings accounts.”

In response, FAIR is calling for improved disclosure of funds’ returns and fees.

“The current requirements – one-time disclosure of fees in the simplified prospectus, and semi-annual reports on total fees paid by the funds – are not prominent enough to serve investors properly. There does not appear to be any requirement to inform investors that MMFs are producing zero or even negative returns,” the report says.

Additionally, FAIR recommends that advisors should consider switching clients to higher-yielding alternatives, such as CDIC-insured premium savings accounts, if there are no other compelling reasons to keep their clients in MMFs. And, it says that investors must be more aware of what is happening in their accounts.

Investors have stayed in MMFs for a variety of reasons, according to FAIR. Some investors use them for short-term liquidity, and are not seeking to maximize their returns; some investors are locked in by high back-end loads; and in the case of segregated money market funds, investors are attracted by their principal protection and other guarantees. Other reasons investors remain in the funds include insufficient disclosure; habit, convenience and inertia; and, a lack of incentives for financial advisors to recommend an alternative, FAIR says.

“Premium savings accounts at the major banks pay 0.75% to 1.0% and are CDIC-insured, compared to 0% for most MMFs. Investors should stay current and well-informed about their accounts and financial alternatives, and not rely solely on their advisors. However, financial firms and advisors should be informing clients of current returns on MMFs and alternatives to the current zero returns. Monthly statements should disclose the current interest paid on MMFs,” added Pascutto.

IE