NEW YORK (MainStreet) — Cash is only cash if it has a famous face on it and you can hold it in your hand. Investors, spared by the government from calamity during the financial crisis, will need to face that reality sooner rather than later – and new regulations affecting money market funds may speed that lesson up a bit.

A dollar in, a dollar out

For money market funds, a dollar in has by and large translated to a dollar out, perhaps with a bit of interest earned along the way. This $1 net asset value has been the cornerstone of cash held in investment accounts. And for retail investors, that worked fine — until 2008 when one fund wrote off its bad Lehman Brothers debt and priced its fund at 97 cents on the dollar. Institutional investors immediately ran for the doors, liquidating their holdings in the fund and, in doing so, nearly left unsuspecting retail investors with less than one dollar out.

Jay Sommariva was managing $50 billion of fixed income assets for BNY Mellon the day the Reserve Primary Fund “broke the buck.”

"We had skin in the game at that point — it was the worst,” remembers Sommariva, now with Fort Pitt Capital Group in Pittsburgh. “Just like everybody else, we had to put gates up on our portfolios because there was a mass exodus of the institutional money — what they call the 'smart money' — that knew what was going on."

While institutions with hundreds of millions were redeeming their shares, retail investors with mere thousands of dollars were mostly clueless.

"They had no idea — until four or five days later, and then they started to get a whiff of what was going on. And obviously by that point it was too late," Sommariva says. "The funds were in disarray. If the government didn't step in, I think I heard there would have been 30 money market funds that would have broken the buck the next day. It would have been a total disaster."

New money market fund regulations

"In 2008, you had $350 billion a week flowing out of money market funds, and 90% of that was estimated to be institutions," says Ethan Powell of Highland Capital Management in Dallas. "So the government had to step in and say, 'We need to provide a sense of certainty and security for Americans.' That's what really drove the Treasury to say, 'Look, we're not in the business of backstopping the principal of institutional investors.'"

In an effort to prevent a similar future run on money market funds, regulators have issued rules set to go into effect in October 2016. But large investment firms such as Fidelity, BlackRock and JPMorgan are already beginning the process of adjusting their money fund offerings. To start, most are separating institutional investors from the mass-market consumer. The institutional funds will have a floating NAV while retail investors will still see $1 shares. Still, even with such a fixed-share value, investors shouldn't consider a money market fund as money in the bank.

"That's the ironic thing about it," Sommariva says. "These regulations have not changed anything. It still is not money in the bank. There's an implied guarantee that if something goes wrong, the bigger investment firms that manage this money will step in and make you whole because that's what has happened for the last 30 years. The retail investor thinks that they own cash, and it's really not cash. You own a bunch of securities that make up that portfolio."

For better or worse?

Sommariva thinks that, in the long run, the new regulations may even make things worse, particularly for the typical U.S. investor. He contends that by maintaining a fixed-share price, investors will still feel a false sense of security – mistakenly believing that a dollar in means you are assured of a dollar out. "So I don't know if they've actually fixed the problem," he adds.

By separating institutional assets from those of the retail investor, he believes regulators are hoping that if there is another run on money market funds, the government won't have to step in to backstop the assets. And if history does repeat itself, the new regulations can institute those redemption gates again — restricting institutional and retail investors from accessing their money and making them pay a fee once withdrawals are allowed.

"I'm positive that the retail investor doesn't know that this is happening," Sommariva says flatly.

There are no riskless investments

"I think that what this reform does, to financial intermediaries and hopefully to the individual investor as well, is make them realize there is no such thing as a riskless investment," Powell says. "I think if you fast-forward a year or two years from now, you're going to have the investing public thinking a lot more critically about how they park their cash."

Without the free ride of a riskless investment, investors will have to put their money where their mouth is and be willing to accept the consequences.

"Now they're actually going to have to assess risk-liquidity-yield-return expectations and treat it like another risk portion of their portfolio — which is frankly where it should have always been, if not for government intervention," Powell said.

Powell also believes the new regulations will spur the investment community to develop new near-cash solutions.

His firm is developing just such a short-term income option now: an "ETF wrapper" of collateralized loan obligations. By bundling leveraged corporate debt, Powell says an investor may be able to garner an attractive yield from the fund, packaged as an investment-grade AAA risk. But those CLOs, to this point held primarily by banks, insurance companies and other giant investors, are nowhere close to a riskless investment.

ETF wrappers and other such income investments may seek to provide an alternative to money market funds — but again, they’re not money in the bank.

— Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick