Fidelity after Edward Johnson III

A Boston Globe columnist, Steven Syre, has a column about speculation currently swirling around Boston: What will happen to Fidelity after Chairman Edward C. "Ned" Johnson III? Johnson is 76, and his daughter Abigail is a major Fidelity shareholder, but it's not clear what role she would play. Another potential internal candidate may be out of the running, too, says Syre and Fidelity Investor editor Jim Lowell:

Now Bob Reynolds , the company's chief operating officer and legitimate dark-horse succession candidate, has complicated the picture further by becoming a finalist in the competition to select a new commissioner for the National Football League. He is among five remaining candidates for one of the best jobs in professional sports.

"Everyone at Fidelity understands there's going to be a major transition sooner rather than later," says Jim Lowell , publisher of the Fidelity Investor newsletter. "It sounds to me that he's laying the groundwork for his own exit strategy. There's something in Fidelity's current playbook that has led Bob Reynolds to say he's willing to switch teams."

Syre has more to say on the subject, and prints a lot of gossip in the column, but the important thing for Fidelity customers to remember is changes at the top will have an inevitable effect on the services we receive from the company. Because when a new chairman comes in, personnel changes and policy changes are a given. And the new folks may not like the way the website looks or performs, and may determine certain services are not profitable enough and push through changes that make it more expensive or less convenient for the little guy.

And while some of these changes will be transparent and well publicized, others may pushed to the end of a legalese-filled license agreement or buried in the fine print of a prospectus, where we're less likely to notice and therefore less likely to complain.

Hedge fund fraud

Brooke Masters of the Washington Post has an article ("Tipster Set Fund Scandal Snowballing") about how a series of "drop a dime" calls to Eliot Spitzer's office resulted in an investigation of the mutual funds industry, and related hedge funds. The tipster, Noreen Harrington, a former Goldman Sachs trader, lifted the covers on after-hours trading and other market-timing tactics, and blew the whistle. It's a very interesting story, and it's told in language that non-traders can understand. Read the article here.

Energy tips for a heat wave

The country is moving through a heatwave. 100-degree temperatures. People darting between air-conditioned cars and office buildings. Kids running through sprinklers. Air con and fans on all night. Eggs frying on sidewalks.

But there are some opportunities to save money, especially when it comes to energy costs. Timing air conditioning on/off times is an obvious choice. Using the cooler basement rec room to relax or sleep is another.

Less obvious: Adjusting water heater standby temperatures. We switch from 140 degrees to 120 degrees in July, because hot showers are out of the question in the summer, and our boiler will use a lot less energy trying to maintain hot water at 120 degrees, compared to 140 degrees.

In the car, I open the windows in town, rather than using A/C to cool off. But when I hit the highway, I close the windows and turn on the A/C -- the increase in aerodynamic efficiency outweighs the energy loss from using A/C. I also carpool two days a week, and try to coast as much as possible, which entails using both the gas and brake pedals less. If I had cruise control, I would use that as well, but that's not a feature on our Ford Escort wagon.

What about when there's no power? We lost power four times in the past 24 hours. During the day, there's not much we could do -- head to the basement maybe, or out to the backyard, where there's some shade and the kiddie pool. The fridge and freezer can't be opened, so we have some canned juice in a cupboard. At night, we tried to keep the kiddies calm (all under five, and anxious when the lights failed). We have candles ready, and a hand-cranked flashlight in the cupboard as well (incidentally, this a great item to have in the vacation home, if you have one).

What are your energy-saving tips? Do you have a blackout emergency drawer, or do you just wing it when one hits?

Burned by Cingular II: A pattern of poor service, and sales sleaze?

Well, well, well. Remember Fidelity Observer's post in April, complaining about poor service from Cingular ("Customer disservice: Burned by Cingular")? It seems that this is not an isolated incident. A Federal lawsuit claims that millions of former AT&T Wireless customers (such as myself) were the victims of a deliberate effort to force them to upgrade to more expensive plans, but degrading service. Ars Technica has more details.

Is Fidelity Observer surprised by Cingular's alleged sleazy treatment of inherited customers from AT&T Wireless? Not at all. Promises to give us the same service levels we experienced under AT&T are typical corporate P.R. speak, designed to lull customers and regulators into a state of trust and acceptance.

Will the legal activity right the wrongs? Fidelity Observer is doubtful. I think we all know what will happen when a class action lawsuit is filed on our "behalf", and it actually succeeds. A bunch of lawyers walk away with millions, customers get $25 coupons to use for future Cingular services, and Cingular gets to walk away without admitting any wrongdoing.

Caveat Emptor!

Indexing strategy: How to screw it up

Mark Hulbert of the New York Times revisits the indexing debate, by pointing to the results of a long-term study by The Hulbert Financial Digest tracking the performance of newsletter recommendations and the S&P index. Fewer than one in seven was able to beat the S&P over the 26 years of the study. But there's another element that must be considered, and that's the psychological stamina of individual investors:

This psychological dimension is crucial in interpreting long-term performance. In the usual pattern, buying and holding an index fund becomes a widely popular strategy during long bull markets At such times, many investors find it much better — and more predictable — than trying to determine either the market's short-term gyrations or which individual stocks will outperform others. By the bottom of the subsequent bear market, however, most of those converts to buy-and-hold index fund investing will have thrown in the towel, unable to tolerate the pain of pursuing it over the long term.

Hulbert notes that investors without the discipline to stick to the strategy during the downturn will lose more than they would have by following a newsletter's picks, or taking up the services of a professional adviser.

Credit card air miles

The Washington Post has a great article by Keith L. Alexander about frequent flyer programs, and how people are using credit cards to build up miles to earn trips. Charging funeral expenses, new cars, and -- Fidelity Observer has a friend who did this -- kids' college tuition costs are all some of the tactics that people use on frequent flyer credit cards. From the article:

Thanks to airline-branded cards, paying for home improvements can lead to get-away-from-home vacations. Carol Lane, a West End advertising writer, recently took out a home-equity line of credit to remodel her bathroom. But instead of paying for the new bathroom fixtures with the line, she used her United Airlines credit card and received 40,000 award miles. She then used her line of credit to pay off the credit card bill.

But there's a hitch, that millions of people have found out when they've tried to cash in their loyalty program miles:

The rush to accumulate miles comes at a time when it is harder than ever to use them. Some airlines have raised the number of miles needed for trips and have reduced the number of U.S. destinations and are flying smaller planes.

Frequent-flier guru Randy Petersen, publisher of Inside Flyer magazine, said travelers often have to book from six to 10 months ahead to get an available seat to popular destinations such as Paris.

Anyone have tales of creative credit card purchases to fund air travel? Or difficulties redeeming frequent flyer points?

TIAA-CREF's five-step program for financial health: Fidelity Observer fails!

There's an article in the June 2006 issue of TIAA-CREF Advance, "Get Your Financial House in Order." It suggests five steps members should take as part of a financial review. Unfortunately, Fidelity Observer only had one of the recommended steps fully under control. The other four steps were either partially completed, or not even started. Here are the five steps, and Fidelity Observer's status for each:

1) Organize your finances

This step involves effectively filing and organizing all of the important documentation you receive. Included are bank and credit card statements, mutual fund documentation, insurance policies, and kids' accounts. This is the only step Fidelity Observer got right -- almost all day-to-day documentation goes into one of those accordian files, with different pockets for bank statements, medical receipts, documents that I might need for filing taxes, etc. At the end of each year I close the accordian file and stow it in the basement, usually only bringing it out at tax time the following April. For the new year, I buy a new accordian file at the office supply store for $10 and start over. Important documentation (birth certs, car and house title, etc.) goes into a fireproof safe that's in the basement. For my mutual fund accounts, which generate too much paperwork for the accordian file, I use 6" three-ring binders -- one for Fidelity, and one for Vanguard. They take years to fill up. I used to use a system of manila envelopes and binders, but there were too many different places to file things, and it was a pain to punch holes in so many documents.

2) Create a Budget and 5) Build an Emergency Fund

Step two in the Advance article explains that you should plan out your budget according to liabilities, net worth, cash flow, etc. By doing so, you'll be better able to plan for retirement and free up money for savings. Step five says you should create an emergency fund to carry you through crises. Fidelity Observer isn't so thorough with budgeting; our family pretty much spends everything we have on living expenses without any planning and the extra goes into retirement accounts.

We know our mortgage and average credit card bill; when our USAA bank account seems to build up an excess of cash it usually gets eaten up by one-time large expenses -- car repairs, a crown not covered by dental insurance, summer camp fees, or our trip to visit the in-laws overseas. When savings gets up to $5000, we put a few thousand dollars into our Roth IRAs or the kids' 529 plans.

Over the past few years I've noticed we've been unable to fully fund our Roth IRAs; we simply don't have the extra cash. I am not sure budgeting -- perhaps using an electronic tool like Quicken or Microsoft Money -- would help, as we already are very stingy. We don't get cable TV, we don't have monthly mobile phone plans, we drive used cars and I carpool a few days per week, and we clip coupons. Building an Emergency Fund is simply out of the question, unless I decreased my workplace 401k contributions.

3) Review and Update Your Insurance

This step is all about life insurance, and it's an area that Fidelity Observer must admit that's lacking. My wife is probably the only person in the family who's adequately covered through a term insurance policy and my workplace group insurance. I have maxed out my workplace group insurance (about 1.2 times my annual salary), but got a rude awakenening when I applied for term life insurance: a medical condition effectively doubled what I would have to pay every year. We simply didn't have the money. Until we do, there's not much I can do for life insurance.

4) Work on a Will

Bottom line: Fidelity Observer simply doesn't have one. I don't know how much lawyers cost if I want to get a will professionally drawn up, but I've heard that there are simple computer-based wills you can generate which do a basic job. I'll look into these and report back in a different post.

5) See step 3

Do any readers have advice regarding the five steps described above? Can anyone say that they have all five under control?

USAA advertising: What the ad didn't mention

"pfblog reader" left a few comments and questions on an earlier post ("Bait and Switch: USAA Federal Savings Bank"). Despite the fact that USAA is raising fees as much as 400%, he or she seems to be supportive of USAA. He/she suggests there may be a very good reason for raising the photocopying fee from $1 to $5:

Does USAA offer electronic access to scanned checks and past statements? If so, then maybe the copying fee is sort of a discouragement to prevent people from asking USAA to do something that the customer could just print off the webpage? In that way, I can see why the statement copy and photocopying fees are that high. I would imagine that it is not because photocoying something costs $5, but that they have to hire someone to do this [obsolete?] job ...

Interesting, but that doesn't make much sense, as customers are sent printouts of their statements and cashed checks every month, and they are free, at least for the type of checking account I have. Of course, there must be some reason behind USAA doubling and quadrupling fees, but they did not explain it in any of the documentation I was sent.

The comment by pfblog reader brings up another point, about the marketing material that highlighted the features of the accounts:

I didn't see any of the adverts that touted the low fee checking accounts--did they publish the old fees (for statement copies, etc.--the ones you listed in the post) as examples of these low fees? If so, then that does seem like bait and switch. Most of the "low fee" checking account adverts I've seen, though, tout the low fees associated with minimium balances, electronic bill pay, and stuff like that. If they didn't cite these as specific examples, then I'm not so sure the bait and switch argument is as strong. If someone didn't even know what the cost was before, then maybe they don't care about it or at least it didn't "bait" them into signing up for the checking account. Right? If you don't see the bait, then how can it bait you?

Hmmm. What exactly did the advertisements say about low fees, back when I signed up? I went into my basement, and dug out last year's bank paperwork to examine the marketing material that USAA used to lure me and other USAA members to register for Federal Savings Bank accounts.

And you know what? It turns out the advertisement didn't say anything about low fees.

It said "no fees".

That's right, no fees. Not "no fees" with an asterisk, or "no fees, except for certain types of bank services." No fees, period. Here's the text of the advertisement, which is featured on page 4 of a little booklet entitled "Your Guide To Banking at USAA":

Put your money to work

Checking. Pay no fees, optimize cash flow.

You'll never need to change accounts again. Our no-fee checking account will follow you no matter where you live or travel. Enjoy no monthly service fees, no minimum balance requirements and unlimited check writing privileges.

There are then nine bullet points describing some of the features of the account, and urging people to sign up. Only one of them mentions fees:

Automatic refunds every month on fees other banks charge for using their ATMs.

This bullet also refers to some fine print at the bottom of the page, which says "No charge for the first 10 ATM withdrawals at non-USAA ATMs per monthly statement cycle; additional withdrawals are $1 each. USAA Federal Savings Bank will refund up to $15 for ATM surcharges incurred per account, per statement cycle."

Still, there is no fine print talking about photocopying fees or any other fees. I am sure a lot of people read that and said -- "Sounds great, sign me up!"

But wait. On page 16 of the booklet there is a "Service Fee Schedule". Are these applicable to the checking account? It's not clear. There is no reference to these fees on the page 4 advertisement, nor is there any indication on page 16 about which accounts the service fee schedule applies to -- there is USAA savings account, CDs, and IRAs described in the booklet.

So, pfblog reader, there's the bait: A bank account that's described as "no-fee checking", but actually has fees, which seem to rise very significantly every once and a while.

Notably, the USAA Web site still describes this account as "No Fee Checking," and the fine print on that page does not mention the service fee schedule. If I were USAA, I'd think about changing the name of this account, making the presence of fees very clear to prospective customers, and taking a hard look at how new services are marketed to members. Customers don't like being misled. Deceptive advertising, and unexplained major fee increases are resented by customers. If repeated, they could erode USAA's status as one of America's most trusted companies.

Caveat emptor!

S&P Lowers Fidelity's Debt Outlook

Standard and Poors reports that Fidelity Investments Life Insurance Co. and Empire Fidelity Investments Life Insurance Co. (collectively, Fidelity Investments Life Insurance Group, or FILIG) debt outlook has been lowered (click on "Fidelity Investments Life Insurance Co. And Affiliate Outlook Revised To Neg From Stable"). This has an impact on FMR, the parent company that runs Fidelity. Here's the reason for the downgrade:

The negative outlook on FMR is principally due to the loss of market share caused by the underperformance in domestic equities, as well as the higher risk profile stemming from the investments in noncore businesses. If FMR fund performance backslides or if higher risk/lower margin noncore businesses, such as Pro-Build, were to exert significant pressure on FMR's financial performance, ratings could be lowered. Alternatively, if last year's restructuring of the asset management business proves a success in more challenging equity markets, or the operations, sale, or other disposition of these noncore businesses enhance FMR's financial position, the outlook could be revised to stable.

Fidelity Observer doesn't have any other analysis relating to the S&P report, although Chris Reidy over at the Boston Globe was able to dig up a few quotes from Fidelity's PR ace, Anne Crowley.

USAA Federal Savings Bank: Bait and Switch

I made a comment in an earlier post about USAA, "A corporate partnership that's useless for consumers," that has turned out to be wrong. Here's the comment:

The benefits of the USAA Federal Savngs Bank account are generally quite good. I have free bill pay, I have not been nickel and dimed with fees (like BOA) and most ATM fees are refunded.

I spoke too soon about the nickel-and-dime part. I just opened my monthly statement from the USAA Federal Savings Bank, and inside is a three-page document describing changes to the account agreement. The boring legalese changes are put in the front, which no doubt fools a lot of customers into thinking the paper can be thrown in the trash. However, on the last page are some significant changes to USAA's "Service Fee" structure. Here's the rundown:

ATM Service Fee beyond the first ten free withdrawals:
100% increase (From $1 to $2)

Check Chargeback Fee
No increase ($5)

Official Check Fee
150% increase (from $2 to $5)

Statement Copy
100% increase (from $5 to $10)

Photocopy Fee
400% increase (from $1 to $5)

Federal Express Fee
14% increase (from $7 to $8)

Outgoing Wire Transfer Fee
60% increase (from $12 to $20)

USAA insurance has built a reputation of being great to its customers in terms of service and keeping costs low, as evidenced by the praise-filled comments on the Consumerist. But after seeing the USAA Federal Savings Bank new fee structure, I am convinced it is not much different than any other national bank out there. It's the same classic bait-and-switch tactic I've seen practiced by Bank of America, Citizens Bank, and many other institutions out there: Launch a big marketing campaign stressing low fees on its accounts to build market share, and then two years later, once customers have gotten all of their bills hooked into online bill pay and are dependent upon other banking services, nickel and dime them with new fees and various restrictions.

The fact that USAA Bank is heavily used by military personnel makes this even more discouraging. Lots of folks serving overseas or moving around are more likely to need photocopied documents, Federal Express delivery of statements, etc.

Caveat Emptor!

Update:

There has been a response to my posts about the playground insults and the fee increases from an anonymous USAA employee at the following link:

http://www.fidelityobserver.com/2006/06/usaa-responds-to-fidelity-observer.html#comments

I have also responded at that location.

USAA responds to Fidelity Observer with a playground insult

A few weeks back, Fidelity Observer criticized USAA for its expensive marketing campaign touting the supposed convenience of using the UPS Store QuickPost to mail in deposits to the USAA Federal Savings Bank. I didn't see any added convenience -- in fact, driving to a UPS Store to mail a deposit envelope is very inconvenient for most customers, as they are not nearly as common as post offices or mailboxes.

However, a reader named Jason pointed out an actual benefit of the USAA/UPS Store partnership:

The major advantage seems to be the option having your money post to your account the next day if you needed the money in there or just wanted the extra days of interest.

Jason's right. This indeed may be helpful to some customers who have a big check that they need to clear ASAP. However, this wasn't stressed in the original message (see text here). Even if it were, it didn't deserve a glossy, expensive mailing to the many thousands of USAA banking customers.

In any case, yesterday afternoon I was surprised to see this new comment by another poster. It echoes what Jason said, but ends on a nasty note:

One benefit of the QuickPost system is that it sends your checks next day air to the processing center, meaning they clear faster. Might be worth reading the info you get in the mail next time. Next time, ask for an info packet with fewer "big fancy words" and more pictures, perhaps your small brain will understand it better!

The immature tone of the comment is typical fare for online discussions, but I was quite suprised to see who made it. The person didn't leave his or her name, but left an electronic trail nonetheless, which showed up in the website visitors' log. The trail leads to San Antonio, Texas, and one of the corporate servers of USAA. Here are the details:

Referring Link: http://www.google.com/search?hl=en&q=usaa and QuickPost&safe=active
Host Name: poplar.usaa.com
IP Address: 167.24.104.150
Country: United States
Region: Texas
City: San Antonio
ISP: Usaa

This tells me that someone with access to one of USAA's corporate servers -- probably a USAA employee -- didn't like Fidelity Observer's negative evaluation of the QuickPost service. He or she explained the next-day benefit of the service, which is fair enough, but the "small brain" comment is out of line. After all, I'm a USAA customer, and expressed some legitimate complaints about the service and how it was marketed. Yet the company has to resort to playground insults to show its displeasure?

Fidelity customer service: A fraud guarantee

Fidelity Observer spotted this guarantee, linked on the front page of Fidelity.com. Fidelity has apparently retooled its anti-fraud policies, and will "reimburse your Fidelity account for any losses due to unauthorized activity." The page details what is and is not covered by the guarantee:

Fidelity will reimburse your Fidelity account if we conclude that there was unauthorized activity resulting in a loss and that the activity occurred through no fault of your own. We will also need to ensure that the activity was not initiated by you (the account owner) or by someone you allowed to access your account.

There are a couple of other catches in the fine print, including this doozy:

"The guarantee will not apply in any situation in which you do not report unauthorized activity promptly to Fidelity."

It's not clear what Fidelity means by "promptly", but obviously this will be a problem for the hundreds of thousands of Fidelity customers who seldom check their account paperwork or online status. I mean, seriously. Fidelity expects us to check our accounts every few days to make sure no one has emptied it? I am not an active trader; it's not uncommon for me to review my account status just once per month, when I am mailed my paper Fidelity statement.

Nevertheless, Fidelity Observer is overall quite impressed by the guarantee, particularly after the negative buzz for Fidelity policies following news of the Strotman memo.

Fidelity also deserves credit for making the customer protection guarantee easy to understand. This is a sharp departure from earlier policy changes, which are usually legalese-filled statements Fidelity periodically forces its customers to agree to online.

Vanguard spam

Whenever I sign up for a website, or register for some service, or even subscribe to a magazine, I always make sure to check off the little box that ensures my email address won't get on some sort of mailing list for company or "partner" promotions. If the form doesn't make it clear what the company needs my email address for, I either leave that field blank or supply my work email address.

Some companies, however, monkey around with communications policies or manage to forget that you opted out of promotional email. Such is the case with Vanguard, which, after many years of obeying my opt-out wishes, suddenly sends an email to my personal account that says "The word is out--low-cost funds."

In other words, Vanguard spammed me.

I am quite disappointed in Vanguard for doing this, but don't have the time to call them up in an attempt to get a "why" or "how" answer. Also, Vanguard has an opt-out link on the spam, so I clicked that, and hopefully the problem is taken care of ... Or should I say, taken care of until the next time Vanguard yet again changes its communications policies, or "forgets" that I opted out.

Caveat Emptor!

Bike to work: An answer to high gas prices

Fuel is selling for around $3/gallon, with no relief in sight. A lot of people are ditching their SUVs and other gas hogs for smaller, more fuel-efficient vehicles, or taking public transportation, if it's available. But there's another way to get to work, that is not only cheaper than driving or taking the subway, but has the added benefit of improving your physical health: Riding a bike.

Fidelity Observer did just that for three years, in the spring, summer, and the early fall, weather permitting. I didn't have to buy any special gear except for panniers and a bell, which cost about $140 combined. I already had a midrange mountain bike, lock, and helmet. I wore shorts and an old T-shirt most days, putting my work clothes and shoes in the panners. The commute was seven miles each way, which worked out to about 35-40 minutes door to door. I felt great about saving on transportation costs -- in fact, we managed on just one car for the entire time -- and felt even better about staying in reasonably good shape.

Of course, commuting by bicycle is not for everyone. You may live too far away from work, or the route may be too dangerous. But if you're interested in getting started, I recommend visiting Bike Worker or a bicycle commuter website local to your area to learn about routes, gear, facilities, shops, and other information.