Thirty-three million individuals' net worth exceeded $1 million in 2015, making them high-net-worth individuals (HNWIs). Net worth considers all of an individual's financial assets, including real estate, stocks, private equity, hedge funds and bonds, minus any debts or liabilities. HNWIs tend to be sophisticated and knowledgeable about investing and building wealth.

HNWIs' Concerns About Investing

HNWIs were concerned about the volatility in the markets in 2015. U.S. Trust published a study in October 2015 revealing that 62% of the HNWIs in the United States parked large percentages of their assets in cash accounts, earning very little return in the current low-interest-rate world. Sixty-five percent said their top investment priority was to minimize taxes, and 35% intended to pursue higher portfolio returns, regardless of the tax implications. As a group, HNWIs believe that reducing risk to protect their assets is more important than increasing risk to chase higher returns. The risk-return tradeoff is an important factor in their approach to investing.

Where Do HNWIs Park Their Cash?

When analyzing the risk-return tradeoff on the investments in his portfolio, the HNWI wants to ensure that the cash component of his total portfolio is protected from loss, liquid and available for immediate deployment into other investment opportunities that will enable him to increase his wealth. The money market serves as a viable, risk-free and temporary solution for his cash, not as a permanent long-term investment. Even though money market accounts generate a slightly negative rate of return in today's low-interest-rate environment, after taxes and inflation are considered, that fact doesn't outweigh the convenience, safety and liquidity features of the money market. After all, the HNWI doesn't depend on squeezing out every percentage point of yield on his cash accounts, as the average investor does.

The Federal Deposit Insurance Corporation (FDIC) insures money market accounts at banks up to $250,000 as of April 2016. Bank money market accounts currently provide an annual percentage yield (APY) of 0.1 to 1.11%, less than the rate of inflation. Money market funds sold by mutual funds and brokerage firms offer similar yields, but they do not offer FDIC protection. Unlike bank money market accounts, they typically provide check-writing privileges. Both types of accounts offer the convenience of daily liquidity, which is an important feature for HNWIs and average investors alike.

Money market accounts make financial sense for the HNWI who intends to reinvest that cash into more productive investments in the near future. However, HNWIs with hundreds of thousands of dollars in cash also have tactical alternatives for investing their money. They can choose from a variety of vehicles to diversify their cash assets and build laddered cash portfolios with staggered maturities. By diversifying across a wide spectrum of cash alternatives and maturities, they have access to daily, monthly and quarterly liquid cash reserves. Some of these alternatives offer higher yields than money market accounts. Cash alternatives include ultra-short corporate bond funds, 90-day Treasury bills (T-bills), short-term certificates of deposit (CDs), fixed-income focused exchange-traded funds (ETFs) and foreign currency CD accounts containing baskets of foreign currencies.

Over the past year, money has flowed out of traditional money market funds and into money market alternatives. This outflow is a result of new Securities and Exchange Commission (SEC) regulations set to take effect in October 2016. The new regulations will require institutional prime money market funds to float the daily net asset value (NAV) share price rather than keeping it at a fixed $1. Retail money market funds will be allowed to maintain a fixed $1 share price, but they could face potential liquidity fees and redemption restrictions in the event of another financial crisis similar to the crisis of 2008-2009.

Today, there is no single solution for parking cash. Yields have been squeezed for all cash alternatives. This significantly impacts the average investor who is desperate for income to pay the monthly bills, but the yield earned on his cash is far less of a concern to the HNWI. He thinks in terms of layers of liquidity for future productive investments. Liquidity, safety, convenience and preservation of principal are an HNWI's main concerns. For these reasons, the money market is a viable investment option for HNWIs.

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