Fewer mutual fund firms are likely to stay in the money market fund business going forward. That is the prediction made by Marty Flanagan to advisors at Schwab's Impact 2009 conference in San Diego on Tuesday.

Flanagan, CEO of Invesco, told advisors that the increased complexity of running money funds in the wake of new rules created in response to the breaking of the buck by the Reserve's Primary Fund a year ago would cause some fund firms to pull out of the market.

"There will continue to be consolidation in the money fund industry. If you [fund firms] don't have the resources to put against the portfolios, you are not going to be in the business," said Flanagan.

He added that because of the events at Reserve (now reorganized as Double Rock), money funds are stronger today and feature greater transparency for investors.

"Collectively, all of us feel that what was a very good product will be even better," Flanagan told advisors. He added that last year's events provided an unparalleled stress test and Reserve's investors will apparently come through the events with a 99 cents-on-the-dollar payout on the fund. The events have also educated the industry, he added.

ICI president Paul Schott Stevens, the panel moderator, also provided some insights into events during the days when the mutual fund industry and regulators were working to respond to the Reserve's problems.

The Treasury ended up implementing a guarantee program that would protect any shareholders in money funds as of September 18. In the case that a fund's NAV fell to $0.995, the program calls for the fund to be liquidated and the Treasury to make up any shortfall.

No fund has yet caused the government guarantee to be invoked. It is set to expire this week.

"We were able to do it [create the guarantee program], without creating unexpected consequences with the financial system," said Stevens.

However, not all institutions were happy with the program.

"The very idea that there would be a guarantee of some kind raised a howl from the banking industry," he confided. The banks were concerned that the money fund guarantee would create unfair competition to bank products from the mutual fund products. To overcome that objection, the Treasury implemented the holding date cutoff for guarantee coverage.

Flanagan also praised the industry's reaction to the crisis.

"The industry and government rallied to put together a program that was literally done in two days. The program is a model in how to do things right," said Flanagan, noting that the Treasury expected to raise $1.2 billion from this program.

Going forward, Flanagan expects that the controversial call for a floating rate NAV will not make it past the SEC, though the proposal did cause consternation around the industry.

"That just got everybody's hair on fire," confided Flanagan before adding that he "just does not see that happening."

"It makes no sense at all for what it does for investors and how the product is used," said Flanagan.

Randy Merk, head of Charles Schwab's fund arm, supported Flanagan's assessment.

"It would be a nightmare for the system if the cash account is not fixed [if the rate floats]. It can be done, we have systems that can do it, but it would be very confusing," Merk told the advisors.

Panelist Peter Crane, publisher of a money fund newsletter, told the audience that only three of more than 130 comments filed with the SEC support the proposition for a floating NAV.

Separately, Schwab's Merk told advisors that Schwab's waiving of as much as 70 bps of its fees to keep its money fund return at one basis point or above could cost the firm as much as $200 million in lost revenue this year. He emphasized that ensuring the minimum return was essential to the fund.

"Yes, we are not making as much as we normally make. Yes, it is putting a crimp in Schwab's earnings in 2009 and 2010 ... analysts know that ... but it is something that must be done," Merk told the advisors in response to a question from the audience.  

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