With the Federal Reserve expected to lower interest rates this week, wealth managers and RIAs may soon need to recalibrate conversations with clients about where to hold short-term cash. The extraordinary run into money-market funds, which has been one of the defining themes of the post-2022 investment environment, could start to lose steam if yields retreat meaningfully from their recent highs.
As of the week ended September 10, assets in money-market funds totaled $7.302 trillion, according to the Investment Company Institute (ICI). This marks another milestone in a trend that has persisted for nearly two years. Much of the recent momentum has come from the institutional side. ICI reported that institutional money-market assets rose by $42.58 billion during the week, compared to a far smaller $1.24 billion increase from retail investors.
Shelly Antoniewicz, chief economist at ICI, points out that such institutional flows often increase in the weeks leading up to quarterly corporate tax deadlines. But in this case, anticipation of Fed policy may also be driving the surge. “We often see institutional money-market fund assets rise as the Fed lowers short-term interest rates,” Antoniewicz explains. “Institutional investors who can allocate either directly into short-term instruments or through money-market funds tend to favor funds when the Fed begins easing, because the yields offered by funds typically lag the decline in the fed funds rate.”
The dynamic reflects both investor behavior and structural features of money-market products. Since 2022, when the Fed embarked on its aggressive tightening campaign, cash instruments regained their appeal after years of near-zero yields. At the peak, investors could earn close to 5% in certain money-market funds—levels that felt almost risk-free compared with volatile equity and fixed income markets. Even after modest cuts last year, yields remain attractive by historical standards. The Crane 100 Money Fund Index was yielding 4.1% as of September 11, according to Crane Data. Still, that figure is likely to trend lower as soon as the Fed begins a new cutting cycle.
This backdrop has created an unusual and somewhat counterintuitive situation: rising balances in money-market funds have coincided with a strong equity market. Normally, investors would expect to see one rise at the expense of the other. Instead, both have climbed together, raising questions about what happens next.
Jeff Buchbinder, chief equity strategist at LPL Financial, argues that this “dual rise” may soon reverse. “Assets in money-market funds have been on the rise since 2022, and if rate reductions are delivered roughly on pace with market expectations, this capital currently on the sidelines is likely to be called into the big game,” Buchbinder wrote in a September 10 note. He adds that the shift in the relative math will be decisive: “The meaningful move lower in rates currently priced in would diminish money-market earnings and potentially lead investors to redeploy capital—ending the unusual trend of money-market assets rising alongside equity prices.”
If that occurs, advisors could see a rotation of client capital back into equities, whether in the form of index allocations, active strategies, or thematic investments. For RIAs managing household portfolios, the timing of such flows could create opportunities to help clients dollar-cost average back into markets rather than attempting to time peaks and troughs.
But there are countervailing factors that advisors need to weigh. Gene Goldman, chief investment officer at Cetera Financial, highlights valuations as a near-term concern. “High valuations may put pressure on equity prices,” he acknowledges. But like Buchbinder, he sees opportunity in the cash sitting on the sidelines. “We have been telling our advisors and their clients that money-market assets, along with savings accounts—which represent a record total of $27 trillion—are dry powder on the sidelines waiting for better valuations and a key reason we remain in a buy-the-dip mode.”
This “dry powder” narrative is powerful, but advisors should avoid over-promising. As Bank of America Global Research noted in an April 2024 report, money-market outflows historically begin around 12 months into a rate-cutting cycle—not right away. That timeline suggests that even if the Fed begins easing this week, a meaningful wave of cash migration may not appear until late 2025. Advisors who position clients for a sudden and dramatic flow back into equities could risk disappointment.
Another layer of complexity is behavioral. Even when the relative case for equities over cash strengthens, investors do not always act quickly—or at all. Andy Reed, head of behavioral economics at Vanguard, cautions that “stuck cash” is a real and persistent issue. “If you see cash sitting in an IRA, it’s basically because people forgot to invest it,” he notes. “It’s a result of lack of initiative, not necessarily a strategic decision.”
Reed emphasizes that inertia plays a bigger role than many advisors realize. Even when clients acknowledge that the opportunity cost of cash is growing, three hurdles often block action: recognizing a better option exists, understanding the difference is meaningful, and actually executing a decision. “Inertia can get in the way of all three,” he says.
For RIAs, this presents both a challenge and an opening. The challenge is overcoming client inertia, especially in a period when cash yields, while lower, will still be reasonable compared to the last decade of zero rates. The opening lies in proactive engagement: systematically reviewing cash balances across client accounts, especially in retirement vehicles, and initiating conversations about alternative allocations.
This moment also calls for nuanced planning. Advisors cannot assume that every dollar currently in money markets is destined for equities. Some clients, particularly retirees or those concerned about near-term liquidity, may be unwilling to take on additional risk. The weakening economy and signs of a softening jobs market complicate the picture further. For clients nervous about employment security or future expenses, maintaining a cash buffer may feel more prudent than chasing incremental equity returns.
What’s more, while institutional flows tend to be more tactical and responsive to Fed policy, retail investors move differently. Advisors should be careful not to extrapolate too much from the institutional side. Retail clients often respond more slowly, and their decisions are influenced as much by emotions, perceptions of market risk, and personal circumstances as by yield comparisons.
Still, the numbers are hard to ignore. With $7.3 trillion in money-market funds and $27 trillion in savings accounts, the aggregate pool of liquidity sitting outside risk assets is unprecedented. Even modest reallocation could provide significant support for equities or other asset classes. For advisors, the key is helping clients deploy cash strategically, balancing the desire to capture higher returns with the need for risk management and liquidity.
That means conversations should not only focus on equities but also on fixed income and alternatives. If the Fed cuts rates aggressively, high-quality bonds may regain appeal after years of volatility. Similarly, private credit or real assets could attract clients who want more yield but are wary of equity valuations. Advisors who broaden the conversation beyond the binary choice of “cash versus stocks” will be better positioned to capture flows.
Another consideration is taxation. For clients holding significant cash in taxable accounts, the after-tax yield differential between money-market funds and other instruments will narrow as rates decline. Advisors should analyze tax-equivalent yields and use those calculations as a way to demonstrate the opportunity cost of staying in cash.
Ultimately, the outlook for money-market assets in a falling-rate environment hinges on three factors: Fed policy, investor psychology, and advisor engagement. The Fed sets the playing field by determining the pace and depth of rate cuts. Investors, both institutional and retail, then decide how much to act on those changes versus remaining inert. And advisors play the crucial role of translating macro conditions into client-level strategies.
For RIAs, the practical takeaway is clear: the Fed’s upcoming decision should be treated as a catalyst for portfolio reviews. Even if cash balances don’t move overnight, this is the moment to prepare clients for the reality that money-market yields will decline, perhaps substantially, over the next 12 to 18 months. By initiating these discussions now, advisors can position themselves as proactive stewards of client capital, ready to guide thoughtful reallocations when the time is right.
The story of $7.3 trillion in money markets is not just about cash. It is about opportunity cost, investor behavior, and the strategic role advisors play in helping clients optimize portfolios in a shifting environment. Rate cuts will test whether inertia or opportunity proves stronger—but either way, the advisor’s role will be indispensable in shaping the outcome.
