Fidelity Observer

Fidelity after Edward Johnson III

2006-08-03T20:43:00.002-04:00

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

2006-07-23T21:57:00.001-04:00

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

2006-07-19T08:30:00.002-04:00

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?

2006-07-11T23:05:00.001-04:00

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

2006-07-02T13:19:00.001-04:00

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

2006-06-26T00:50:00.002-04:00

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!

2006-06-21T00:07:00.001-04:00

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

2006-06-12T00:22:00.004-04:00

"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

2006-06-06T19:41:00.001-04:00

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

2006-06-06T07:35:00.003-04:00

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

2006-06-01T08:33:00.002-04:00

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

2006-05-25T21:24:00.001-04:00

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

2006-05-19T08:13:00.001-04:00

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

2006-05-14T14:55:00.001-04:00

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.

Fidelity Magellan taxes and distribution

2006-05-12T20:23:00.001-04:00

The Fidelity Report blogger has posted about Fidelity Magellan's massive distribution last week.

He/She makes a good point about large mutual fund distributions and the tax consequences for funds held outside of retirement accounts. It's basic advice that most of you already know, but worth visiting if you are just getting started on saving and investing using mutual funds.

Vanguard's Bogle: Hypocrisy on mutual fund pay?

2006-05-12T08:03:00.001-04:00

Ross Kerber of the Boston Globe has an interesting story this morning about Vanguard founder John Bogle (of indexing fame) and his quest to force fund companies to reveal top executives' pay. One of his critics, Daniel Wiener, editor of the Independent Adviser for Vanguard Investors, points out that Bogle took steps to shield his own pay levels when he ran Vanguard in the 1990s. From the article:

In the May issue of the Independent Adviser for Vanguard Investors, editor Daniel P. Wiener wrote that Bogle's recent proposals make him ''the 180-degree man." In an interview, Wiener said Bogle oversaw steps that removed details about executive compensation from Vanguard's fund filings later in the 1990s, and called him a ''hypocrite."

''It's amazing Jack Bogle is so vehement on this topic," Wiener said, even though he supports more disclosure himself. He said a more likely motive is that Bogle wants to tweak the current Vanguard chairman, John J. Brennan.

Bogle dismisses that notion, and said the data disappeared from Vanguard's filings in the 1990s because of new SEC reporting guidelines. Since other companies weren't required to report pay, he said, ''I didn't see any reason to disclose."

Bogle called Wiener's charge of hypocrisy ''fair enough to say" and acknowledged he didn't like it when Wiener reviewed documents filed by all Vanguard funds for 1991 and calculated Bogle's compensation at $2.6 million, a widely quoted figure in the business press.

''I didn't like having it in the public eye," Bogle said. ''It looked like I was making a lot of money relative to others in the business, and I was really tail-end Charlie."

You can read more about Bogle's change of heart in the Globe article.

Now, I wonder how much Fidelity's top execs are making? I very much doubt we'll ever find out, barring a court case that brings salary records into the public eye.

Fidelity Magellan: What's the problem?

2006-05-08T08:07:00.001-04:00

Fidelity Observer just received this message from a reader, regarding Fidelity Magellan (FMAGX):

I’ve been watching Fidelity Magellan. It went from 115 to 94 yesterday. Does anyone know what happened? Was it a distribution or something?

Yes, there was indeed a drop of 21.25, or 18.33%, late last week. And it was indeed a distribution. But that didn't stop some people from nearly having heart attacks after logging onto Fidelity.com, judging by the thread on the Investment Banter message board:

Last night my account only showed the NAV drop with no updates to shares held and overall value.

Another poster has a message for the programmers of the Fidelity.com website:

Last night it was showing only the negatives : lower price per unit, lower total money in Magellan, lower number of units !!! Just like a stock plunge.

I guess the cheap programmers in Bangalore now have another glitch ("enhancement", I think they call it) they can fix. But only if someone lets them know. We may be the only folks who noticed!

Not anymore! I know that some Fidelity employees read Fidelity Observer, perhaps they can pass along a message to the Fidelity website people that:

A) share holdings should be updated earlier or

B) unusual NAV changes in Fidelity Funds should automatically trigger a red text message in the "My Accounts" area, notifying people of the reason (distribution, etc.) and that it may take an additional day for individuals' share holdings to be updated.

USAA deposits: How it works, why it sucks

2006-05-05T00:28:00.001-04:00

Fidelity Observer just got a fat mailer from USAA Federal Savings Bank, promising great things. Quickly I discovered that its contents were useless.

Fidelity Observer already banks through USAA. 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 fees) and most ATM fees are refunded. However, there are no physical branches, which means all transactions take place through the Internet or through the mail, with preprinted and first-class prepaid desposit envelopes. This also means cash deposits are not possible. So when I got the fat mailer promising "a new way" to mail in my deposits, I was excited. Could this mean a safe way to mail in cash, or some other great improvement?

Not quite. Here are the details of the "new way" to send in deposits:

Dear --

USAA has teamed up with the UPS Store to bring you QuickPost. Now simply drop off your USAA desposits at the UPS Store nearest you, using a QuickPost envelope and your USAA deposit slip. It's one more way USAA is making banking more convenient for you.

Huh? So instead of dropping my deposit slip in a mailbox (i.e., the "old way"), now FO has the option of dropping the deposit slip off at a UPS store (the "new way"). What's the benefit? For consumers, there is no benefit -- unless you believe the USPS are incompetent, and UPS Store employees are totally trustworthy.

On the other hand, there is a benefit for at least one of the corporations involved. The UPS Store will get more new customers coming into its stores and perhaps doing additional business beyond dropping off USAA deposit envelopes.

But Fidelity Observer has no idea of the benefit to USAA, as any USAA customer with two brain cells to rub together will see that the new partnership doesn't add up to much.

Airline seating: A really strange solution

2006-04-25T04:42:00.001-04:00

I sometimes refer to airline coach seating as "cattle class", but Airbus is taking the concept to a new low. This excerpt is from an April 25 article by Christopher Elliott of the New York Times:

Airbus has been quietly pitching the standing-room-only option to Asian carriers, though none have agreed to it yet. Passengers in the standing section would be propped against a padded backboard, held in place with a harness, according to experts who have seen a proposal.

While this seating plan may not "fly" in this country, the airlines are finding new ways to cram more seats into coach class, as evidenced by American Airline's "density modification program," says the New York Times article. Not surprisingly, the motivation is money:

... American said its "density modification program" had added five more seats to the economy-class section of its MD-80 narrow-body aircraft and brought the total seat count to 120 in the back of the plane. A document on an internal American Airlines Web site, which was briefly accessible to the public last week, estimated that the program would generate an additional $60 million a year for its MD-80 fleet.

Maybe American's new motto should be "sticking it to the little guy."

Caveat emptor!

Expensive digital cameras: How to unlock value

2006-04-24T01:37:00.001-04:00

Two Christmases ago, I received a very nice digital camera as a gift. I specifically requested the model, a Fuji Finepix S7000, for its features that approached that of an SLR (manual focus, shutter speed, and apeture settings, etc.) but wasn't too expensive. It was also a brand that I trusted -- my first digital camera that I bought back in 2000 was manufactured by Fuji, it takes pretty good snapshots, and has an excellent interface.

Anyway, back to the new camera. I have not used it that much. Part of the reason has to do with its bulkiness, but there were two other issues that held me back: its extreme sensitivity to motion when shooting indoors and low-light conditions (I don't like to use flash) and its limited memory (the camera came with just a 16MB xD card).

Both of these issues have easy remedies -- tripods and bigger memory cards -- but I refused to get them. I felt that such a nice camera ought to be fine out of the box without additional expenditures.

I put up with settling for mostly outdoors shots for over a year, but I finally gave in three days ago and decided to drop some more money on the camera. There was a straw-breaking-the-camel's-back moment that precipitated my change of heart: I attempted to take a picture of my sleeping son at naptime, but the pictures ended up blurry, even with multiple shots, holding my elbow against my chest to steady my hand, adjusting shutter speed and ISO settings, etc. That night I was passing my a photo store, and stopped in to price tripods. I was surprised at how inexpensive the small collapsable ones were. I ended up getting a cheap Giotto, and the very next day started using it. The results: Totally excellent. I've shot outside with the tripod fully extended and in restaurants with the tripod in its smallest form sitting on the table, and the results are superb. I've finally unlocked the value of my $400 camera, and all it took was an additional investment of about $20.

Next, I'll upgrade the memory, which will let me use an even higher quality setting, save the images as RAW instead of JPEG, and get more pictures in the camera before the "Card Full" message appears. Unfortunately, it won't be a $20 investment (xD memory cards with 256MB of memory start at $25) but I really think it will help me unlock even more value from the camera. I'll keep you posted ...

Cingular customer service: Totally burned

2006-04-15T00:26:00.001-04:00

Fidelity Observer is a reluctant mobile phone user. I have talked about it before, but it needs to be discussed again. I put off getting a mobile phone as long as I could -- I didn't talk much on the phone, the plans seemed like an expensive commitment, and I didn't want my life to be dominated by the phone the way my friends' lives were. I eventually caved when my wife was pregnant with our first child, and wanted the reassurance of being able to instantly communicate in case of an emergency. But I still got only the bare essentials -- a pay-as-you-go plan with AT&T Wireless' cheapest and bulkiest phone. We bought two phones, one for me, and one for my wife.

We have kept the 1990s-era phone (and a slightly smaller 2002 model that my wife uses) through all of these years, along with the pay-as-you-go plan. I still don't talk much with friends, but on several occasions the phone has been great to have for car emergencies and shopping coordination. But recently I've noticed a change in the service I'm getting from Cingular, which acquired AT&T Wireless a few years back. First there was some monkeying around with the pre-paid programs' pricing. Then there was the experience I had today, which brought to light three major problems with Cingular's service

1) An inability to buy over the phone more minutes just before my current minutes expired -- the automated system hung up on me when I attempted to buy time on either phone
2) An inability to register online to manage my Cingular account, or use my old logon information from AT&T Wireless.
3) An inability to get anyone on the phone to discuss these problems, or buy more minutes

A little background: I usually buy $25 dollars worth of minutes (I think about 100 minutes) which last for 90 days, unless you renew before the time is up, in which case they'll last another 90 days. That's expensive, I'm sure, compared to the plans most people use, but I'm only paying about $100 a year for connectivity (plus another $100 for my wife). we have a few hundred minutes stored up on each phone, which we want to keep. That's why it was so important to get through to buy more minutes.

But the phone tree just dumped me at the instant I pressed "2" to indicate that I wanted to make a purchase with a major credit card. No reason was given -- the system said "Thank you for using Cingular!" and hung up.

Hmm. Let's try online. I went to the Cingular site, indicated I was a former AT&T customer, entered our phone numbers, but no dice: They couldn't register this type of account. My old AT&T logon info didn't work either.

OK, so let's talk with a human. Dial the 866 number. Navigate through the tree, then press 0 to speak with a human. Listen to some not-bad jazz, and the repeated messages about how important I am, and apologies for keeping me waiting.

But no human ever came on. I got on before 1 pm, and hung up at 1:20 pm, angry at my inability to conduct two simple transactions or speak with someone who can help.

Keep in mind that I am not a nuisance customer for Cingular. I am a loyal customer. I use old equipment, pay high per-minute fees, don't receive any paper mailings, almost never bother their human reps, and in this case, only wanted to pay them more money. But I wasn't able to get through.

And I am not the only one having problems. Seattle Duck, another AT&T orphan, has also had a trying experience with Cingular.

Is it time for me to ditch the 1990s brick and get a new phone and new service provider? Any companies I should steer clear of?

American Cars III: What about the dealers?

2006-04-10T00:54:00.001-04:00

Mac Tonite left an interesting comment on an earlier post about American Cars, and brings up shady dealer practices. He uses the example of Saab, pre- and post-GM, and finds the need for repairs increased once Saab repairs were moved over to the local Cadillac service center.

His suggestion seems to be that dealers representing the Big Three are snakes, while foreign car dealers have more integrity.

I am wondering if this negative perception of dealers ties into the quality perception of American cars discussed earlier -- that is, quality rankings for American cars are affected by excessive bogus repairs authorized by greedy dealers. The cars may not need the repairs, and the quality is actually good, but the dealers for the Big Three recommend them anyway to boost their profits.

Meanwhile, foreign car dealers restrain themselves, either because they have more integrity/less greed, or because customers are extremely sensitive to high priced foreign-made parts and the dealers don't want to scare them away.

Does this sound plausible? Any dealer stories that support/contradict this?

Hackers target mutual fund accounts

2006-04-08T14:46:00.001-04:00

If you're the victim of a "phishing" incident (you respond to a bogus email, and hand over social security numbers, account numbers, and passwords) or someone uses other illegal methods to steal your logon info for your mutual fund accounts, do you think you're protected, and you'll get reimbursed?

Think again, says Kimberly Lankford's column in the May Kiplinger's: (Page 97, link not yet available, subscribe here):

Question: "... What if someone hacks into my account and empties it? Would I have any legal recourse to require the mutual fund company to reimburse me for the loss?"

Lankford's answer: "To put it bluntly, no. 'Customes have no recourse unless they can prove that the institution was negligent in the theft,' says Matt Bienfang, senior analyst with TowerGroup, a financial services consulting firm" (please read the rest of the article when it comes online, there are a few other caveats as well)

That's not the worst of it. If you're like most people, you are probably at great risk for this type of loss, by virtue of your computing habits. Ask yourself these questions:

1) Do you use a Windows PC at home?
2) Do you write down passwords, and leave them near the computer?
3) Do you use the same password at multiple websites?
4) Do you share account information, including passwords, with other people?

If you answered yes to any of these questions, it's time to take some steps to minimize the risk of getting hacked. These aren't hard things to do, and may save you a lot of money and grief. Here's Fidelity Observer's five-step program to safe computing with an eye to protecting your assets:

1) Get a Mac. Home computers using Windows operating systems are terrible security threats, even if you have security software installed. There are just too many vulnerabilities, many of them are unknown or poorly understood, and there are thousands of exploits that take advantage of them and people's trust. Spyware or malware can be installed onto your computer without your knowledge -- often by clicking on a popup ad or downloading a plugin -- and from there can steal your passwords and other information. Almost all of these hacker tools are aimed at computers running Windows, not only because the operating system is junk, but also because that's what most people use. That doesn't mean Macs are immune, but to date I have never heard of this type of software aimed at the Macintosh OS X operating system. The Mac OS X is also a pleasure to use, is great for Web surfing, can run identical or even better applications that your home Windows machine can use (with the exception of games), and never crashes for most people. Fidelity Observer uses an iMac. My sister uses an eMac, which is aimed at students. But I just bought a Mac Mini for my parents, which is a great choice because it's cheap ($600, plus $200 for the Applecare 3-year warranty) and they can use their old PC monitor. Mac laptops include the lower-end iBook and high-performance MacBook Pro.

2) If you can't get rid of your PC, then at least get a decent security software package. Fidelity Observer doesn't use a PC, so I can't recommend a particular package, but here's a selection of current security software.

3) After you get a Mac or upgrade your security software, change your passwords on the most critical Websites and applications that you use -- financial, email, tax, etc. Use a robust password that can't be guessed. Not your birthday, kids names, pet's name, your own name spelled backwards, or something from the dictionary. It should ideally be a combination of lower and upper-case letters and at least one number. I often do this -- make up a sentence, and then use the first letter of each word. Here's an example:

GCI06WSd (Go Cleveland Indians '06 World Series dream)

Wh3ka1cnR (We have 3 kids and 1 cat named Rufus)

4) Don't use the same password for different sites. If one of those sites gets hacked, they could conceivably get into your accounts on other sites. Also, consider changing the password every 12-18 months.

5) Once you have reset your password, don't share it with anyone else unless you have to. My spouse doesn't even know mine. Don't leave it lying around on a slip of paper next to the computer, where someone else can find it.

Anyone else want to share their safe computing habits, or horror stories?

American Cars, part II: Laying blame

2006-04-07T08:21:00.001-04:00

Earlier this week I talked about American cars ("American cars: What's wrong?") People had some interesting comments, not only talking about their own vehicles, but also what they think is wrong with the way American cars are created. Phil noted this aspect of American car buyers:

" ... A large segment of the car-buying public make their choice based on a non-economic critera. Ford, GM, and Chrysler never had to have better quality control because people didn't use quality as the main decision-making criterion. This creates an inefficient car economy, the result being lower-quality American cars."

He also pointed out the use of advanced automated technology in Japan.

These views would suggest that American car makers and consumers are to blame. I certainly don't dispute that people make buying decisions for the wrong reasons -- status, advertising cues, self-perception -- and American carmakers are shirking on quality, but there's some other factors at work, too:

1) GM, Ford and Chrysler are getting hammered on health care costs. Countries with national health care and healthier populations have a competitive advantage, and it forces the American companies to save money in other areas -- getting cheaper parts, or processes to make the cars.

2) The Big Three automakers and the unions have made some ridiculous pacts that waste billions of dollars and lead to lowered productivity.

Case in point: GM and Ford's programs which pay employees not to work. GM's version is called "Jobs Bank", and if the company doesn't need it's workers, it is forced to pay them to do something else -- many volunteer or take classes on GM's dime, but thousands of others sit in rooms reading magazines all day, and they've been doing it for years. GM now has 7500 employees in the program, which will cost it up to $900 million this year, based on current wage levels, according to the Wall Street Journal story, "Detroit's Symbol of Dysfunction: Paying Employees Not to Work," by Jeffrey McCracken, page A1 (sorry, don't have the date, but it's within the past few weeks).

How can American car makers be competitive in an environment like this?

American cars: What's the problem?

2006-04-05T08:23:00.001-04:00

I think practically everyone has heard about the latest auto quality rankings, which put Japanese cars at the top of the list. This is a trend that's been going for decades. The American press, public, and politicians complain, Detroit comes up with new models and a pledge to improve things (remember "Quality is Job 1"?) but not much changes.

Or does it?

I own two American cars, and I have to say I am quite satisfied with the overall quality of the vehicles. One is a Ford Escort station wagon. I bought it used after my '88 Toyota Corrolla gave up the ghost. The Escort has been a dependable vehicle for commuting and hauling stuff around, and to date has only required minor repairs. It gets between 25 mpg and 30 mpg, depending on various conditions. The other is a Nissan van built by a Ford factory in the midwest (that's what the sticker in the door says, at least). We also bought it used. I am not too happy with the gas mileage (15 mpg by my calculations) but it's a safe vehicle for my family, and can be used to haul around big items.

Are these cars exceptions? Maybe. The Escort was made in the late 90s, when it had been in the manufacturing cycle for 15 years or more and presumably most of the bugs had been ironed out. The van is Japanese engineered. The Consumer Reports ratings partially depend on user-submitted data, and the current crop of American models just couldn't measure up to Japanese cars.

However, I wonder if stereotypes come into play. Owners of American cars are more sensitive to problems, because they confirm the bad things people have heard about them, while owners of Japanese cars are more willing to overlook defects or won't admit them.

Do you own an American car? Has it been reliable? What about your Japanese car?

BOA fees: More nickel-and-diming ahead!

2006-03-30T08:51:00.001-05:00

Bruce Mohl of the Boston Globe breaks a story this morning about Bank Of America raising fees yet again:

An internal Bank of America memo obtained by The Boston Globe said the tiered fee structure for overdrafts and bounced checks will change June 9, with the fee for two to four occurrences over a 12-month period rising from $31 to $33 and the fee for occurrences beyond four rising from $34 to $35. The fee for the first day's occurrence is remaining at $19. An occurrence is defined as a day with at least one overdraft or returned item.

Mohl talked to one of BOA's PR flacks, who said the vast majority of customers never overdraw their accounts. That leads me to ask, if so few people do it, then why bother raising fees? It will piss off a lot of people, and with few offendeers, there can't be much in the way of profit for BOA.

Well, the reason why BOA is doing it is because there is a lot of money in it for them, and BOA's PR person was downplaying or lying about the frequency of people who overdraw their accounts. From the article:

Greg McBride, a senior analyst with Bankrate.com, said he suspects that overdraft fees are big revenue generators for most banks, although he said banks don't break out specific fee income. He said overdraft and bounced check fees have been rising quickly in recent years. McBride said the average bounced check fee was $26.90 last fall.

BOA's customer service reps are already preparing for the fallout. They've been issued scripts telling them how to deal with angry customers.

Fidelity employee's epic dinner results in laptop theft

2006-03-27T18:38:00.001-05:00

More news about Fidelity's lost laptop that I talked about last week, which resulted in nearly 200,000 HP employees having their personal information stolen:

It wasn't the case of a Fidelity employee being robbed. The employee in question left the laptop in his car in a restaurant parking lot, while he and some of his colleagues had a three-hour dinner in California. Information Week has more details, which the Wall Street Journal dug up.

ComputerWorld has a round-up of earlier reaction to Fidelity's screw-up, which includes a quote from Fidelity Observer!

Power savings in your home

2006-03-25T09:08:00.001-05:00

The April 2006 issue of Kiplinger's magazine has a great feature, the Ultimate Savings Guide (starts page 75). There are 89 tips to help you save living expenses and put away money for retirement. Here are some examples that can help save money on electricity spending:

Identifying electricity hogs: The article recommends several devices that can identify and eliminate "stealth" energy leaks. These are caused by devices that continue to drain power even when turned off. To find such leaks, Kiplingers recommends P3 International's Kill-a-Watt Electricity Usage Monitor, which costs $30 and can measure the stealth usage of devices that plug into a wall socket.

Plugging the leaks: Kiplinger's points to the "Smart Strip" power strip, which it says really turns off the power to a device when the power of the device is "off". There's also the 3050 Plug Load Control power strip, which detects motion and turns off devices when you leave the vicinity.

Fidelity loses laptop, 196,000 HP employees' data lost

2006-03-23T08:56:00.001-05:00

Seems like Fidelity doesn't really take the security of its customers' data very seriously. Last week, a laptop containing the personal data of nearly 200,000 current and former Hewlett-Packard employees whose retirement accounts are maintained by Fidelity was stolen.

Fidelity and HP are keeping mum on many of the details, such as where the laptop was stolen from, but revealed that it wasn't on the premises of either company. I am therefore going to extrapolate that it was probably an employee taking the laptop home, or on a business trip. Further, the article does not say if the data was encrypted, but Fidelity claims that the 'license for the software which contained the data has expired. As a result, the scrambled data is difficult to interpret... it is in a form that is generally unusable.'

Hmmm. I am already disappointed that Fidelity sends customer data to India, a country which has ineffective criminal penalties for data that is stolen or illegally sold. Now I find out that employees can walk out of the office with a laptop containing sensitive information of its customers.

Your customers deserve better than this, Fidelity!

Transpacific airline ticket warning

2006-03-21T08:48:00.001-05:00

A follow up on my post from earlier this year on buying transpacific airline tickets, and a warning.

First, I was able to score some reasonably priced tickets. Not through the Internet, but through a real live travel agent, as recommended by Wendy. The problem with searching for Internet tickets: Misleading prices on Yahoo Travel (such as fuel surcharges, see details here) and very high prices on every other site, including the official airline sites. This suprised me -- aren't airlines (or some of them, at least) supposed to have the cheapest tickets on their own sites? Anyway, one of the Asian travel agencies was able to get us sorted out relatively quickly for a reasonable price -- Just south of $800 for the adults, six hundred something for our older child, and two hundred something for the toddler.

Now to the warning I mentioned earlier: USA Today on March 15 editorialized about some consumer protections for passengers that a group of U.S. airlines are attempting to overturn. Currently, federal regulations state that airlines have to advertise domestic base fares in a clear, understandable manner. The airlines want to change this so ads can apparently fine-print everything including "fuel surcharges", higher-priced aisle seats, and other fees. According to the article, the airlines are American, United, Northwest, Delta, and Continental.

To me, it sounds like the tricks cable, car, and phone companies use in their advertising to sucker people into buying their products -- you sign on for the advertised price, but then get billed for "service fees", "connectivity charges", etc. Knowing the way Washington works these days, I am betting a business- and lobbyist-friendly government and legislature is going to let ordinary people like us get screwed.

Caveat Emptor.

Fidelity's financial services "store" on Amazon

2006-03-17T13:20:00.001-05:00

The Boston Globe is reporting that Fidelity and Amazon are partnering to sell Fidelity mutual funds through Amazon.com. The details are here. There is also an active Fidelity minisite on Amazon, complete with a Fidelity blog that looks like recycled advice from Fidelity magazine.

In the Globe article, there is an interesting quote from John Bonnanzio of the Fidelity Insight newsletter:

"They're right up there advertising with Tire Rack and Weight Watcher on the Amazon website ... But Fidelity is in a fight for market share. It needs to reach out well beyond its traditional markets. It needs to go where the eyeballs are."

Financial services retreating from funds?

2006-03-16T08:46:00.001-05:00

Earlier this month, Tom Lauricella and Ian McDonald of the Wall Street Journal wrote an article about financial services firms giving up the funds game ("Merrill Deal Hastens Wall Street Retreat from Funds"). Using Merrill Lynch as a case study, the authors note that this is a reversal of the trend in the 1990s of companies providing all kinds of financial services, including bank accounts, mortgages, mutual funds, and insurance packages.

There are a few factors at work, suggest the authors. One is investors are getting disillusioned with fund performance, and are turning to other investment vehicles: Ordinary investors, to indexing and ETFs; and many rich investors, to hedge funds. Across the industry, fund managers have to deal with stricter regulations, and attempt to be competitive on fees. Additionally, brokers affiliated with financial services companies have to be careful when recommending in-house funds to clients, owing to worries over conflicts of interest.

Some companies have merged funds with other companies' funds; others have sold or traded management of funds. Northwestern Mutual is selling its Mason Street Funds. Citigroup did a swap of its money management group for Legg Mason's brokerage business. AmSouth Bancorp sold its mutual fund business to Pioneer. In Merrill's case, after attempting to change the name its funds group, is trading it to BlackRock for a 49% stake in BlackRock.

How many digital devices do you carry?

2006-03-15T08:36:00.001-05:00

Fidelity Observer wants everyone to do a little exercise, right now. Think of the last time you travelled to the office, or went on business, and count the number of digital devices on your person. Look in your pockets, briefcase, or on your wrist. For most people, it's almost guaranteed that it's at least three, and as many as six or seven.

I went through this exercise myself on a recent business trip. It occured to me that the digital device explosion was getting out of hand, when I counted the following items filling my pockets and briefcase while I was packing. There were the following items:

1) Laptop
2) Mobile phone
3) USB flash drive
4) iPod
5) PDA
6) Digital voice recorder.

There would have been seven items if I had brought my watch, but I seldom do anymore because three of the other devices I am carrying -- the PDA, laptop, and mobile phone -- can tell the time. Bringing a watch would have been redundant.

The overkill doesn't end with telling the time. I was carrying five devices capable of playing back audio (the laptop, phone, iPod, PDA, and voice recorder), three devices with some sort of calendar function (laptop, PDA, and iPod) and several devices capable of serving as near-range flashlights (the phone, iPod, and PDA).

Did I need all of these devices? I certainly used them all, but probably could have gotten by without the iPod and USB flash drive. But they serve useful functions, too -- the iPod for entertainment on the plane, and the USB drive to backup and transfer crucial files on my laptop.

As people living in modern society, digital devices certainly can make us more productive as workers, or make life more enjoyable, but they can also be a burden -- not only in terms of cost, but also in terms of lugging the darned things around! It would be great if some of these functions could be effectively merged into a single device, so I wouldn't have to carry so many.

So do your own digital device inventory. I'd be curious to know -- do you think that you really need them, or are they more in the line of entertainment devices, or even status devices?

Fidelity's struggles with Abigail Johnson, and a turnaround?

2006-02-25T14:33:00.001-05:00

Kris Frieswick of The Boston Globe Magazine published an analysis of Fidelity Investments on February 19. There are a couple of angles Frieswick explores -- ranging from Fidelity's migration of offices and employees to other parts of the country (its headquarters is in Boston) to the history of the Johnson family. But more interesting to me (and you) is the analysis of why some of Fidelity's funds have had poor performance and what the company is doing to rectify the situation.

The fact that some of Fidelity's best known brands have stumbled is not new news. Fidelity Observer has discussed these issues before, particularly as they relate to Magellan. But Frieswick points to another factor which helps explain poor performance in the past five years. It's the SEC rule called Regulation Fair Disclosure, which came into effect in late 2000. From the article:

It prohibited companies from sharing material, nonpublic information with anyone likely to trade its stocks based on that information. The rule was intended to put a stop to the sorts of back-office, wink-and-handshake conversations that CEOs tended to have with portfolio managers and analysts from big money management companies that owned lots of a company's stock. That type of information gave those big stock managers an investing edge that was denied smaller firms and individual investors, and it is generally believed that Fidelity managers relied heavily on it. Once Reg FD passed, Fidelity's portfolio managers had to rely on primary research from the company's supposedly vaunted research team ...

The new rule, combined with a downturn in stocks in the early part of this decade, creamed a lot of Fidelity funds, says the article. Moreover, Abigail Johnson (of Fidelity's Johnson clan) was named president of Fidelity Management & Research Co. in mid-2001. She had experience running a mutual fund, but according to sources cited in the article, her performance wasn't great, and now she was leading the S.S. Fidelity through a very stormy period. She wasn't able to turn things around. Big pension funds started making noises, and Abigail was removed to another division, the article relates.

But Frieswick seems to think Fidelity may be on the verge of a turnaround:

In addition to the management change, the company has plans to double the size of its research staff. It will make research a lucrative career track unto itself, allowing analysts to specialize in sectors they like and spend years learning its intricacies. Previously, research was a training ground for portfolio managers. In a strange echo from the investment committees of long ago, Fidelity has also begun assigning several portfolio managers to manage larger funds together, an arrangement used very successfully at other big mutual fund competitors like American Funds. It has moved more aggressively into index funds that mimic the look and feel of benchmarks like the S&P 500. A new manager was assigned to Magellan in November, and early signs seem positive that a turnaround may be afoot.

Time will tell.

Wells Fargo customers: Beware!

2006-02-18T14:32:00.001-05:00

David Lazarus of the San Francisco Chronicle points to a an alarming development for users of Wells Fargo's online banking service: According to new end-user agreements issued by the bank, customers apparently have to agree to accept Internet-only communications.

There's more. If you want paper statements, you can ask for them, but you might be assessed a fee. The agreements force you to acknowledge that online service is not guaranteed to be working "at certain times", and if that's the case and you talk with a human being via Well's Fargos phone service, you may be assessed another fee. And if you don't use online bill pay for three months, the bank might cut you off from accessing the service. Lazarus lists a bunch of other nasty surprises buried in the 11,000 words of legalese.

And if you don't like Wells Fargos new rules, or don't understand the documents, tough cookie. The only option is to accept the bank's B.S. provisions, or leave.

Fidelity Observer has pointed to problems with long or incomprehensible EULA statements. Lazarus has also been a good source of information about companies screwing over ordinary customers, as in this account involving Fidelity not properly authenticating customers and emptying accounts to con-men.

Tax software: What's better, TaxCut or TurboTax?

2006-02-16T23:18:00.001-05:00

It's that time of year. Tax Time! Not including the old school filers (who still use a paper form and pencil) and those who can afford an accountant, tens of millions of Americans are turning to software packages to file their taxes. Tonight I started my electronic filing, but wanted to see how others are faring. A few questions:

What tax software do you use? TaxCut? TurboTax? Something else?

What's the best thing about electronic filing?

What's the worst thing about electronic filing?

What needs to be changed about electronic filing?

How much do you pay for electronic filing, including federal, state, and filing fees?

When emails get nasty III

2006-02-16T08:05:00.001-05:00

This episode of nasty emails takes a detour to the world of law, where sharp debates and withering retorts are a regular part of courtroom life.

Lawyerly debates sometimes spill over into the electronic world, as evidenced by this exchange between attorneys William Korman, 36, and Dianna Abdala, 24. Abdala decided to back out of a job offer to work at Korman's legal practice after he decided to reduce the salary offer. A curt email exchange ensued. The account is from Massachusetts Lawyers Weekly.

The Fidelity Frog?

2006-02-11T14:35:00.003-05:00

On the heels of my last post about Super Bowl advertising (thanks for all the comments!), I have noticed a new development at Fidelity. Fidelity account holders may have noticed an unusual graphical addition to Fidelity.com in the past few days: A small frog icon.

The Fidelity Frog appears in two places: the navigation bar, right behind the "Contact Us" button, and on the Contact Us page itself, pointing at the link which says "Email a Rep."

Is this the new Fidelity mascot? Why have a frog? Does it make the site more fun to use for customers who happen to be under the age of 10? Does it suggest better service, investment advice, or retirement planning? Has Fidelity outsourced customer service to frogs in a foreign country? Is the frog going to replace Paul McCartney as Fidelity's new pitchman?

And why a frog, and not, say, a dancing dollar bill? Is it because "Fidelity" and "Frog" start with the same letter? They are both green?

Help me understand this one!

Tax paperwork: Good for two things

2006-02-07T07:41:00.001-05:00

W2s, brokerage tax forms, and bank and mortgage statements are piling in. These are the documents we need to prepare our tax returns, but they serve another purpose as well: Evaluating your own financial performance over the course of 2005.

The year-end beige statement that Fidelity sends out is particularly useful. It breaks down each account by balance, starting and ending amounts, contributions, and a key metric -- gain (or loss) less contributions and withdrawals.

2005 was a good year for me. Our family's Fidelity accounts -- mostly mutual funds, but a few stocks, an ETF, and the kids' 529s -- gained about 15% over the course of the year (not including contributions to our Roths). That's pretty good, but this level of performance came with a risk: Our Roths are heavily invested in foreign-oriented funds ... About 45%, which is quite high according to the recommendations of most profesional money managers. Taking this level of risk can seriously backfire. I learned this the hard way in the late 1990s, when several international financial shocks shook foreign markets.

I am not counting on a similar stellar year for foreign funds in 2006. I haven't done in yet, but will rebalance in the next few weeks, and decrease my foreign exposure.

Fidelity's Super Bowl Play

2006-02-05T23:15:00.001-05:00

You may have spotted it in the 4th quarter, or maybe not -- it was only 30 seconds long, and no humorous hook, like 75% of the ads during The Game.

But I knew as soon as I saw the Paul McCartney montage and heard one of his Wings hits that it was for Fidelity. I had to explain to my dad why Fidelity chose him -- my dad's a pre-boomer (What I like to call "Generation D" -- for people born during the Great Depression).

Good move by Fidelity: There's probably 30 or 40 million boomers watching the game. Who cares if Macca's British? Anyone who was 17 between 1964 and 1984 can identify with him, to a certain degree.

Benchmark index for mutual funds

2006-01-26T07:57:00.001-05:00

Any respectable fund nowadays will compare itself with the benchmark index that most matches its holdings. There's a few problems with these types of comparisons, though.

First, any fund that invests in stocks outside of the index deviates from the index. For a fund whose composition only has a handful of non-index holdings, that may not be such a big deal. But what about those funds whose holdings are very different from the index. Is it really a legitimate comparison? And how fair is it to compare two funds that benchmark themselves against the same index, but when compared with each other, have almost nothing in common? This leads me to ask: Are there any standards in the funds industry for comparing performance in the case of funds whose holdings don't closely match any index?

Second, some fund companies create their own indices in order to provide a benchmark for investors. The benchmarks can be questionable. Case in point: Fidelity Global Balanced Fund, which compares itself to the "Fidelity Global Balanced Composite Index." According to page IV of the Shareholder Update for this fund, this Fidelity-created index is a "60%/40% blend" of the Morgan Stanley Capital International (MSCI) World Index and the Citigroup World Government Bond Index. Only problem: The Global Balanced Fund, according to its own annual report, has 62% stocks and equity futures, 21% bonds, and 17% "short-term investments and net other assets".

In this case, I believe Fidelity's Global Balanced Fund would look even more attractive if a cash element was added to the "Fidelity Global Balanced Composite Index", but of course tweaking their own index might work against them next quarter.

Caveat emptor ...

Read this post on PFBlog.com/fidelityobserver -- Reader comments often appear there that won't show up on this page. You can leave comments on either page, I'll read 'em all!

Emerging markets "small print"

2006-01-24T00:50:00.001-05:00

Earlier this month Fidelity Observer talked about various types of mutual funds that invest in foreign stocks.

If you invest in an emerging market fund, you probably are aware of the risk involved. If you invest in Fidelity funds that invest in emerging markets, you might have to dig a little harder for this warning:

"Certain fund's investments in emerging markets can be subject to social, economic, regulatory, and political uncertainties and can be extremely volatile."

Fidelity Observer spotted this on page A-53 of Fidelity's annual report for Fidelity's "Broadly Diversified Equity Funds".

Caveat emptor ...

The Strotman Memo: Widespread Fidelity 401K Fraud?

2006-01-22T00:19:00.003-05:00

Bad news if you are a Fidelity 401K account holder: Some Fidelity customer service reps are apparently not so good at protecting customers' account information, and in a few cases have emptied the account holdings to con men. That's not all: It's not entirely clear if Fidelity will reimburse people have been cheated out of their 401K money.

The story comes from a San Francisco Chronicle reporter David Lazarus. He was able to get ahold of an internal Fidelity memo written by Tom Strotman, a Fidelity "director in customer support services focusing on risk management." According to the memo cited in the Chronicle article, Fidelity has had to make "many unpleasant calls" to customers who have been victimzed in a scam which apparently involves Fidelity customer service reps not properly authenticating people on the telephone, and then issuing 401K distributions to imposters.

Not surprisingly, Fidelity is in full damage control mode. From the article:

"But while clarifying that Strotman's department has not had to make 'many' calls related to incidents like the one described in the memo, [Fidelity senior vice president Anne] Crowley declined to directly refute the document's claim that at least some customers' retirement accounts are being emptied by con artists. 'I'm not going to get into parsing the memo line by line,' she said. "

I am more inclined to believe Strotman, rather than the Fidelity spin doctors. For one, Strotman never intended for this to get out; it was an internal memo intended to educate colleagues to reduce fraud. Therefore, I have to take at face value the statement:

43 percent of "invalid calls" received by Fidelity reps last month were not properly authenticated.

Crowley refused to define "invalid call". It's also not clear how many invalid calls Fidelity received in that month. but the Strotman memo said Fidelity investigated 457 cases of potential fraud in 2005, with "over $31 million in customer assets at risk." When the SF Chronicle asked Fidelity's Crowley about this, this was the result:

Of the 457 cases investigated by Fidelity's customer-service risk management team last year, she said only two resulted in a total of $10,750 being compensated to customers.

Before you have nightmares of your 401K being emptied by identity thieves, consider this from the SF Chronicle article:

Retirement funds held by a brokerage are not insured in the same way that bank deposits are. But officials and lawyers say the brokerage is responsible under federal law for safeguarding 401(k) accounts.

And at this point, I'll add a little more information to this story: So-caled "mumble attacks", which involve con men pretending to be speech impaired to corporate customer service reps in order to gain access to accounts or personal information. Is this what happened in Fidelity's case? Fidelity is not a public company, and perhaps doesn't feel it has to talk about the details.

But regardless of Fidelity's lame response, I must point out that the current system of authentication -- telling customer service reps the last four digits of your social security number, and your birthday -- is a pretty flimsy system to protect $10 thousand, $100 thousand, or $1 million dollars in 401K assets.

And it's not just a problem at Fidelity -- other mutual fund companies, banks, etc., use the same processes. I think in five years biometrics will be a common technology, and a better technology for authenticating people. But in the meantime, we are all vulnerable, to a certain degree.

Airline Web Fare Scams!

2006-01-19T07:35:00.001-05:00

First of all, thanks to everyone who commented on my last post about where to fine cheap airline Web fares. It was very useful information, and I tried a few of the services. However, none of them beat the prices advertised on Yahoo Travel/Travelocity, and I found out why: Fine print gotchas that add hundreds of dollars to the price of four trans-Pacific round trip fares.

The guilty airlines are United, Continental, NWA, and American Airlines. (There's one foreign airline that doesn't have the gotchas, it's described at the bottom of this post). Despite offering attractive "Web fares" between $600 and $800 dollars on Yahoo/Travelocity, clicking on the rules for the four U.S. airlines reveals a much different actual price. Here's what I found in the fine print for the cheapest fare, a United round-trip flight for $613:

Fare details for KECATPSZ

REGULAR EXCURSION SPECIAL FARE FARE

There're 10 paragraphs of standard fine print legalese you usually see on the back of a plane ticket (the old fashioned ones, at least), and then the gotcha:

SURCHGS
FUEL SURCHG OF USD 65.00 APPLIES PER ADT/CHD/INF IN EACH DIRECTION. APPLIES TO TRANSPACIFIC INTL SECTOR. FUEL SURCHG OF USD 55.00 APPLIES PER ADT/CHD/INF IN EACH DIRECTION. APPLIES TO TRANSATLANTIC INTL SECTOR.

In other words, the true cost of the ticket is not $613. It's $743, to take into account the cost of fuel for flying across the Pacific! Can you say deceptive advertising? Also, unlike previous transpacific flights I've taken, there is no discount for children or infants, which would affect us, as we have a preschooler and toddler.

Continental has the same slimy fuel surcharge buried in the fine print, as does American, and NWA. Business as usual, apparently, for these four U.S. airlines as they try to trick cheapskates like me!

The honest airline? Japan Airlines which has a transpacific flight for $713 (fare MLXSSJL), and gives the standard kids and infants discount. I wouldn't expect this from a Japanese airline, which are known for high prices owing to the value of the Yen and high operating costs, but in the case of the searches I performed on Yahoo/Travelocity, JAL beat the U.S. airlines hands-down on price. And hands-down on policies, in my book.

Caveat emptor!

Business Emails II

2006-01-18T20:47:00.001-05:00

Earlier this month I wrote about a nasty email exchange involving Alan Lewis, a European money manager, and Daniel Loeb, a hedge fund manager here in the United States. Following in the same vein is an exchange between Business Week journalist Timothy Mullaney and Patrick Byrne, CEO of Overstock.com:

Mullaney's hard-nosed questions are treated with a fair amount of snark and withering responses from Byrne. It's a very, erm, interesting exchange that says a lot about behind-the-scenes Wall Street dealings.

Online resource for indexers

2006-01-17T07:46:00.001-05:00

If you are interested in investing in an index fund, be aware that not all index funds are the same when it comes to indices covered, fees, and rates of return. A website that can help you sort through the bewildering array of index funds and ETFs is indexuniverse.com. It has some very neat features for investors:

Index analysis tool: This is a searchable database of index funds. Plug in your search criteria (asset class, type of international fund, P/E ratios, expenses, etc) click "search now" and away you go!
Breaking news
Features: Recent articles on Hedge Funds, taxes, portfolio analysis.

There is also an online forum on indexuniverse, but there are not a lot of posts in it yet.

Leave foreign stocks, and back into the S&P?

2006-01-13T07:50:00.001-05:00

Is the rally in foreign markets over? Is the S&P about to get a boost after another lackluster year? Depends who you ask. Jonathan Clements of the Wall Street Journal seems to think the overseas rally may be about to lose steam.

The people he talked with in the Dec. 29, 2005 Personal Journal are looking at the lagging S&P as about to get a boost:

"As these and other market segments have roared ahead, many investors have given up on blue chips. But now, some experts expect the pendulum to swing back the other way -- leaving investors without blue chips eating dust."

There were a range of opinions cited in the New York Times article by Conrad De Aenlle on January 8, "For Bargains, Try Spinning the Globe."

De Aenlle cites a Merrill Lynch survey which found global fund managers still rate the U.S. to be more overvalued than Europe, Japan, or emerging markets.

However, individual managers he talked with have different views from the pack, such as Mark Headley, manager of Matthews Asian Tigers and other Asia-focused funds ("Japan has gotten expensive") and Gilman Gunn, manager of the Evergreen International Equity fund ("I think the very strong three-year performance we've seen in emerging markets may be coming off the boil").

For Fidelity Observer's own portfolio, it is overweight in foreign equities -- somewhere around 40%-45% -- a risky move which nevertheless has really helped in the past two years. However, our 2006 Roth contributions may be put into the S&P -- probably an index fund, as I don't have enough time these days to research actively managed alternatives.

Fidelity Magellan on a rebound?

2006-01-12T08:45:00.001-05:00

It would appear that Fidelity Magellan -- which was once the biggest mutual fund by holdings back in the 1990s -- is on a rebound under new management, according to Ross Kerber of the Boston Globe ("Magellan rebounding after change of manager").

The reason cited by Kerber is that manager Harry Lange "piled into" foreign and tech stocks since taking over in October. Specific stock information is not forthcoming, but there's a rough breakdown of holdings by sector:

Most notably, [Lange] is credited with increasing its foreign holdings, which were just 2 percent of Magellan's stocks in September, according to Morningstar. As of Nov. 30 the figure had risen to 20 percent, including 7 percent in Japan.

Lange also has changed some of Magellan's domestic stakes dramatically. Information-technology stocks were 21 percent of the portfolio at the end of October, but 28 percent as of Nov. 30. Internet-search company Google is one stock that's drawn a lot of attention from Fidelity; securities filings show that Fidelity has become the largest institutional shareholder of the search company.

Healthcare and materials-companies holdings are also up as a percentage of Magellan's holdings. Meanwhile Lange has cut the fund's stake drastically in 'consumer staples,' such as drugstores, beer companies, and soft drink makers.

The article is an interesting read, check it out here.

Get air tickets online?

2006-01-12T00:01:00.001-05:00

This year my family will take a trip to Asia to visit the in-laws. My question: Where should we buy the tickets?

I've checked out Yahoo travel, and was quoted round-trip adult tickets in April starting at about $700. But when I go directly to the airline websites, the prices are at least $1100, even for those sites which have frequent flyer clubs to which I belong.

Why the huge difference? Should I be worried about buying cheap tickets through a website that's not affiliated with the airline? Any recommendations for online sites or services that sell international air tickets?

International fund vs global fund: What's the difference?

2006-01-09T08:47:00.001-05:00

Financial articles and mutual fund marketing material often talk about Global Funds, International Funds, Emerging Market Funds, Regional Funds and Foreign Funds. What's the difference between them? I'll try my best to explain:

International Funds/Foreign Funds: Invest in equities only outside the United States. These terms are interchangeable, although many companies and financial publications prefer "International Funds."

Emerging Markets Funds: Invest in companies that are in "developing" economies, such as Brazil, India, or Mexico. Emerging markets are riskier than developed markets, as many investors in Southeast Asia and Russia learned in the late 1990s, when a series of financial shocks and currency re-valuations played havoc with local stock indicies. Additionally, some markets do not have transparent financial policies or reliable accounting standards. Note also that some developing economies have made a full transition to a developed economy in recent decades, such as Korea.

Global Funds: Invest in the U.S. and in foreign markets. At some funds, managers may make U.S. investments that are tied to export industries or foreign trade.

Regional Funds: Invest in a region -- Europe, Southeast Asia, "Pacific", "Nordic," "Greater China," etc.

Country-specific Funds: Invest only in a certain country, such as Japan or Canada.

When cultures collide, emails get nasty

2006-01-08T14:59:00.001-05:00

When it comes to doing global business, there are a couple views of how people from different cultures react to each other.

There's the Kumbaya vision we see in TV advertisements, where smiling people from different races and countries shake hands in a sun-filled meeting room or clean factory floor.

There's the realist vision accepting that there are some good foreign practices, some bad foreign practices, and some downright irritating foreign practices -- which anyone who has lived abroad or travels overseas frequently can relate.

Then there's the vision based on stereotypes. Things can get ugly when two people let their true thoughts about foreigners be known, especially in the physically removed environment of email. The parties in this particular example are Alan Lewis, a European money manager who sends his resume to Daniel Loeb, a hedge fund manager here in the United States. Read the whole exchange here on the Daily Dose of Optimism blog -- you'll either laugh at the sharp exchange, or cry at this example of human beings proving that it's really impossible for people from different cultures to get along.

Amex card: Why I cut it up

2006-01-05T07:51:00.001-05:00

Earlier this week, I blogged about the American Express plan to create a new card called "The Knot" to attract younger customers. Today I would like to relate my own experience with Amex, and why I cut the knot.

I signed up for the American Express personal "green" card back in the 80s, when I was still in college. It made a lot of sense at the time: I had no other credit cards, and was planning on doing a lot of travel overseas, and needed the insurance that the card offered. The $45 annual fee (which eventually climbed to $55) was worth it, especially for the international travel benefits, such as getting traveller's cheques without fees, getting a replacement card abroad if I lost mine or it was stolen, and having local Amex offices in foreign cities hold my mail.

By the end of the 1990s, however, the value proposition had changed. In terms of international travel, my local bank started offering Amex traveller cheques without charging a fee. I could use my ATM card to withdraw cash overseas in local currency. And the concept of having local Amex offices holding my mail seemed very old-fashioned after I got a Web-based email account.

Additionally, I was able to get a no-fee credit card through USAA, which offered more credit than I needed. Why should I pay an annual fee for a card that I didn't need, and seldom used?

The last straw was in 2002, when I got my bill for that year's usage, which was $55. I had used the card about three or four times in the previous year, mostly at places or websites that didn't accept my USAA Mastercard. What a waste! I called up American Express, and said I wanted to cancel the account. They asked why, and I told them, I didn't like paying $55 per year for a service that I seldom used. The rep offered to cut the next year's fee by $25, but I declined. There was no reason for me to keep the card and I had already spent about $600 in fees -- why spend $30 more?

Fee-based cards are going to have an increasingly difficult time attracting and keeping customers, when there are so many no-fee options available. If you carry a fee-based card -- Amex or other -- could you share with us why you still have it? Rates? Air miles, or other points? It's an "old friend"?

American Express: No-fee cards!

2006-01-04T10:03:00.001-05:00

American Express has a problem: Its cardholders are old. Too old, by their reckoning. According to Robin Sidel in the Dec. 1 Wall Street Journal, Amex execs "acknowledge their customers have been older than 40." What to do?

For Amex, the answer has been a no-fee credit card called "The Knot" aimed at a certain young demographic -- people planning on getting married. The idea, apparently, is to lure this demographic with a card that offers discounts on wedding dresses, honeymoons, and home decor. Then, once the honeymoon is over, somehow migrate them to other American Express cards -- assumedly, those that offer a better financial benefit to Amex through fees, rates, or other financial arrangements with co-branded card partners. The "somehow" bit has yet to be worked out, judging by Sidel's article.

Having been a former young person who once was an American Express cardholder, I have a few pieces of advice for the company. One: the best way to get young people, and keep them, is to offer them a no-fee card that stays no-fee for the life of the relationship. If the company feels its necessary to charge fees at some point, they will lose customers, because there are lots of no-fee arrangements from other issuers, and young people -- many of whom are sensitive to fees -- will simply abandon the relationship for cheaper pastures.

Sure, Amex can try gimicks like reward programs, but judging by what people have told me and I have heard elsewhere, the public is getting skeptical of the conditions, restrictions, and "gotchas" in the fine print.

Later, I'll relate my own experience with American Express, and why I cut the card. There may be a few lessons in it for you, and the company.

BOA's online fees and a discount strategy

2006-01-03T08:27:00.001-05:00

BOA is the latest company to cut online stock trading fees -- from $20 to $14 for brokerage customers, and to $10 for BOA checking account holders. The trading fee will drop to $5 for "certain wealthy customers," reports Ann Carrns of the Wall Street Journal (Dec. 1 issue).

My reaction: Big deal! $14 trades is about the norm for most brokerage accounts, so I don't see the attraction of switching to BOA, unless you already have a checking account and trade frequently enough to justify going through the hassle of closing your old brokerage account elsewhere and transfering to BOA services.

As for the $5 fee for the wealthy, I have to ask -- what is BOA smoking? Rich people are not as likely as the general population to be lured in by low fees -- they're rich, they don't need to worry about fees! Rather, rich people are more concerned about (and willing to pay for) better service, which may work against BOA. That's because regardless of the features and reliability of BOA's online trading services, its brand has been built in different areas -- consumer and commercial banking. If you are serious about trading stocks, do you want to have trades handled by a company with only a few years' experience offering such services on a large scale?

One last shot against BOA: This is a corporate banking institution which makes money on nickel and diming its customers in new and creative ways. A common tactic in consumer banking has been to offer low and have money fees to get people to sign up for checking accounts, and a few years later, change the fee structure -- of course, to the bank's advantage.

Caveat emptor.

Yale's endowment: The problem with the fund industry, and portfolio advice

2005-12-28T14:01:00.001-05:00

The NPR radio program On Point had a guest today from the investment world -- David Swensen, the man who has managed Yale's endowment for the past 20 years (returning 16% on average per year during that time). He had some interesting opinions about the mutual fund industry, and how ordinary investors should handle their own investments.

While soft-spoken, Swensen had a lot of harsh words for the mutual funds industry. Fidelity Observer has touched upon lots of the same things here before -- for instance, deceptive marketing from Fidelity and others -- but Swensen took his attacks to other areas as well. The poor record of active fund managers in aggregate compared to the S&P index is well known, but he didn't just blame poor stock selection -- he says managers have abandoned their fiduciary responsibilities to individual investors, in favor of their own profit motives. He said the Morningstar "star" system is garbage, as it is only based on past performance.

Swensen distilled some advice from his new book, Unconventional Success : A Fundamental Approach to Personal Investment. Three highlights:

1) Stick with index funds

2) Buy index funds through non-profit companies like TIAA-CREF or Vanguard, which have the lowest fees and don't have the same profit motive as for-profit fund companies. Someone asked him about buying low-fee index funds through Fidelity, but he seemed to believe that for-profit companies might do a variation of the bait and switch -- heavily market how much they have reduced fees, and then a few years down the road quietly tack on new costs or fees.

3) Balance your portfolio according to this formula:

15% US Treasuries
15% Inflation-protected securities
30% Domestic stock index fund
15% Diversified foreign stock fund
5% Emerging markets fund
20% Real estate (!)

His advice was to get index funds for the majority of these categories, including Real Estate -- he suggested a REIT-tracking index fund. Swensen also told people to rebalance their portfolios regularly to stay within these parameters.

All of Swensen's advice is explained in detail and backed up by data (or so he claimed on the radio program) in his book, Unconventional Success : A Fundamental Approach to Personal Investment.

Fidelity's push into catering

2005-12-23T20:04:00.001-05:00

Fidelity getting into a sector dominated by Starbucks and upscape catering companies? That is apparently the case, according to Jay Fitzgerald of the Boston Herald:

Last month, Fidelity Capital — best known for owning the Seaport Hotel, World Trade Center and the limousine service Boston Coach — opened a Sebastians cafe to the public at One Devonshire Place, hoping to tap into the appetites of the building’s residents as well as Financial District workers.

Meanwhile, the company purchased New York’s Fisher & Levy Catering this past summer, adding about 200 clients to its corporate catering division, in addition to more than 400 corporate clients now served in the Boston area.

Selling muffins has nothing to do with managing mutual funds, but I am not going to protest too much. Fidelity Capital is, after all, the venture capital arm of Fidelity Investments. They're supposed to look for businesses that they think have big growth potential, and invest in them. I question the potential profitability of anything relating to food service, but obviously Fidelity Capital has researched this niche, and thinks it's a worthy investment. Time will tell ...

Fidelity trustees: Withdraw Gates appointment, unless ...

2005-12-23T15:08:00.001-05:00

Fidelity's independent trustees have appointed Robert M. Gates, the former CIA director, as Fidelity chairman and "top watchdog," according to Ross Kerber of Boston.com. My advice to Fidelity trustees: Withdraw the appointment, vote him out, or do whatever you need to do to get him out of that position. Unless ...

My call for Gates to leave (unless ...) has nothing to do with the SEC rule that requires funds' boards of trustees to be led by outsiders. Fidelity chief executive Edward Johnson III hates it, but I think it's great -- it forces the company to be more accountable to the shareholders of its funds (i.e., us), by deciding on important issues relating to fees and other Fidelity business. I fully support having an independent chairman who looks out for my interests.

But I don't want it to be Robert Gates (unless ...). Why? There are two main reasons:

1) He is the president of Texas A&M University. I have worked in higher education before, and there is no way the president or any other senior officer of a major institution can effectively manage a second major position somewhere else. Gates admits in the Boston.com article that he only comes to Boston on an average of less than one time per month, and does other Fidelity work "on weekends." This position needs more than a part-timer.

2) It seems his pay will approach $500,000 per year. Assuming that the article's claim that he spends "up to 10 days a month" on Fidelity business is accurate, that's at least $4,166 dollars per day. Not only is that far too much for a part-time position, it also tells me that he will be totally unable to relate to the interests of ordinary shareholders, many of whom make less than $4166 per month.

But here's the "unless ..." part of my post:

While I am suspicious of the experience and political connections of a former CIA director, I recognize that having someone from outside the financial world -- particularly someone familiar with conducting critical analysis that takes into account multiple, disparate factors -- is an asset to any organization. Therefore, an ideal solution to this issue is for Mr. Gates to drop his Texas A&M appointment, voluntarily take a pay cut, and devote himself full-time to the Fidelity trustees and shareholders.

Otherwise, Gates should leave.

Fidelity Labs: What is it?

2005-12-19T07:56:00.001-05:00

Spotted this on the Fidelity homepage last week: "Fidelity Labs," a website that apparently serves as a test bed for new electronic Fidelity Investments products. Users are welcome to give feedback about the tools.

There are two beta test tools on the site now that users can play with: Financial Search, and Mortgage Search. I tried out the search feature, and have to say I was a bit disappointed. For instance, searching for "Fidelity Investments" under news returned just the following three results:

Who's a Contrarian? Not me!
Bean Counting and the Latte Factor
Energy Trusts Still Burn Bright

By comparison, Google News returns 740 results using the same search terms. Some are no doubt only marginally related to the company, but I noted that two of the first ten results had information which Fidelity probably doesn't want to publicize too much -- a big shake-up among managers Of Fidelity's international funds. These are the types of results which Fidelity probably doesn't want to show up in its own search engine.

Other problems with Fidelity Search: It doesn't list the original source of the news, and you can't highlight, copy and paste the URL or headline from the search results into another browser or application.

As for the other tool, Mortgage Search, I didn't try it, but have to wonder if this is a sign of another industry Fidelity wants to get into. Time will tell.

Freebie financial magazines: Only one worth keeping

2005-12-15T19:44:00.001-05:00

I get about five or six finance-oriented magazines delivered to my home. One of them, Kiplinger's, is a paid subscription. The others are all freebies, sent to me by various companies with which I have an account, ranging from AAA to Vanguard. But if I could only keep one of the freebies, it would Advance, published by TIAA-CREF.

At first glance, Advance may not seem special. Like the Fidelity, USAA, and Vanguard magazines I get, it's printed on lightweight stock and contains no outside advertisements or promotions. And like the other magazines, many of the Advance articles are informational/promotional in nature, and talk about specific TIAA-CREF services and funds.

But that's where the similarities end. One big difference is the size of Advance -- 30 pages long, with photographs kept to a minimum size. That's about 50% larger than the competitors in terms of amount of text.

The other big difference is the transparency of the content. I feel I know far more about TIAA-CREF, the way it works, and the policies it pursues from reading the magazine. There's a frankness in the Q&A interviews with fund managers, and a responsiveness to member comments and complaints, evidenced by the frequently used phrase "in response to demand from participants." Yes, there is some pap in Advance, but it's certainly a lot less than what I see in comparable magazines offered by Fidelity, USAA, and others.

Additionally, Advance is also honest about mistakes and criticism. Of the four letters printed in the Fall 2005 issue about the previous issue, two are very critical appraisals of articles and two others are "you forgot to mention xyz" comments. Two of the four letters elicit a response from the editor of the magazine. Keep in mind that Advance has a tough crowd to please -- TIAA-CREF serves higher education, and thus has a high proportion of economists, researchers, professors, and other academic types who often have expertise or critical insights into the topics under discussion. Still, Advance didn't have to print these types of letters, but it did, and responded where it could. How many other magazines deal with criticism in their letters to the editor sections?

A lesson in compounding: from a buried '57 Plymouth!

2005-12-14T08:04:00.001-05:00

I love it. The good citizens of Tulsa came up with a unique time capsule idea back in the 50s -- bury a '57 Plymouth Belvedere and some other artifacts of daily life, and unearth it in 2007 to celebrate Oklahoma's Centennial festivities.

Well, 2007 is just over a year away, and already people are getting excited about digging up the car and other artifacts, which include a case of beer, spare change, and an unpaid parking ticket. While I doubt anyone would want to drink a 50-year-old can of beer, there will probably be interest in the $100 savings account that was tied to the burial of the car. It's supposed to go to the person (or heirs) who, in 1957, correctly guessed the size of Tulsa's population fifty years later.

And here's the lesson in compounding, described in the Associated Press article:

Assuming an average annual interest of 5 percent compounded quarterly, such an account would be worth almost $1,200 today ...

Not bad! Some people reading this blog might consider popping $1000 into a savings bond, or bond-based mutual fund -- assuming the value compounds at the same average rate over the next 50 years, that $1,000 will be worth $4,440 in 30 years, $7300 in 40 years, or $12,000 in 50 years. If you place it into an index fund that returns an average of 7%, the value will baloon to $8,000 in 30 years, $16,000 in 40 years, or $32,125 in 50 years.

Two caveats of calculating the 50-year-old savings account value: It doesn't consider fees which may have been levied over the course of five decades by nickel-and-diming bank executives ($1,000 minimums, dormant accounts, etc.).

It also doesn't take into account the fact that the bank account may no longer exist. Over the past five years, two major events impacted the account -- the original '57 bank was taken over by another bank, Sooner Federal, which in turn was liquidated during the S&L crisis in the early 90s. Right now, it's unsure what happened to the account and its holdings. But maybe an alternate prize -- say, a vintage case of beer -- can be arranged.

SEC slapped down on Hedge Funds

2005-12-12T07:42:00.001-05:00

Uh oh. Looks like the SEC might be in for a difficult time in its attempt to corral hedge funds, the loosely regulated and often risky investment vehicles used by rich people and institutions.

Back in October Fidelity Observer wrote about how the SEC's plans to require hedge fund managers to register themselves as investment advisors was flawed, owing to internal SEC resistance to the plan and difficulty applying uniform rules to thousands of funds that apply complicated and very different investment strategies.

But it's not these issues that are giving the SEC trouble. It's a trio of federal appeals court judges, who last week questioned the SEC's authority to even get into the business of regulating hedge funds. From the article in the Washington Post, written by Carrie Johnson:

"You don't have authority to act simply because you exist," Judge Harry T. Edwards told Jacob H. Stillman, the SEC's lawyer.

A few moments later, Edwards said: "We have to test your thesis, and your thesis doesn't hold up."

The court case was initiated by a New York fund player, who sued to stop the fund manager-registration rule. It's too early for him and others in the industry to start dancing in the street, though -- the case is far from decided in the courts, and even if the law doesn't work in the SEC's favor this time, there is always the possibility of public anger over shady hedge fund dealings prompting Congress to legislate the SEC into a more powerful position, or restrict hedge funds in some other way.

Business "journalists" manipulate the market

2005-12-08T07:59:00.001-05:00

Journalists love to preach about their own high ethical standards, but recent events involving plagiarism, made-up news, and the use of sources have led many to question these standards. And business journalists are not immune to ethical lapses, as evidenced by an ongoing court case in England.

The case involves two former newspaper columnists who used their positions to pump up stock prices which they had purchased, and then dump them after their columns printed, thereby making a profit. From the article in the Guardian:

Prosecutors told the jury how the men misled readers by concealing their share dealings, writing stories that turned out to be untrue, and citing price targets that they disregarded when it came to their own dealings.

I am not surprised. Most journalists are honest and true to their profession, but there are always a few bad apples who succumb to greed or other motives. Sometimes, workplace ethics guidelines are thin or not enforced, which makes crossing the line much easier.

In this British case, the journalists were brought down by a tipster and their own stupidity, but not after thousands of readers were misled. I have to wonder, though -- how many other journalists reporting on financial issues have written something for personal gain, but have never been caught?

BBB website security: Fidelity Observer discovers a breach

2005-12-05T07:56:00.001-05:00

I am having a really difficult time trusting the local chapter of the Better Business Bureau. After you hear the reasons why, I think you'll understand.

Actually, you may already know one of them, if you read this blog regularly. A few months ago Fidelity Observer uncovered a serious security vulnerability on the website of the Better Business Bureau serving parts of eastern New England, including the Boston metro area. In a nutshell, practically every person who used its online dispute resolution system in the preceding three years, along with every business that has been involved in a dispute entered into the system, had sensitive information -- personal contact info, financial details, and descriptions of potentially embarrassing disputes -- needlessly exposed. I estimate as many as 20,000 records were exposed until Fidelity Observer alerted the local chapter of the Better Business Bureau to the problem and it closed the hole.

At the time, I didn't get into another potentially major issue with my local Better Business Bureau's website: Its failure to document my complaint about a local car dealership in the BBB's online profile of the company. I had filed the complaint through the BBB's online dispute resolution service in February 2005. It was never resolved (fodder for a future post about deceptive advertising!) but the complaint should have been registered in the BBB's online profile of the company. When it still was not updated after six months, I complained in private to the BBB. My reasoning: other people "checking out" the dealership on the website would be misled into believing that the company was complaint-free this year, when in fact it had at least one complaint. The BBB immediately updated the dealer's BBB profile to reflect my complaint.

But I discovered last week that the profile was mysteriously cleared to clean-slate status.

What's the problem? I'll make some guesses, based on my own understanding of Web technologies, and the BBB's mission. The most rational explanation in my eyes is the BBB is technically incompetent, and hasn't the technology or processes in place to keep its online profiles up to date and accurate. This theory is backed up by my earlier experience of uncovering a security vulnerability on the BBB website, that went unnoticed by BBB staff for three years. If this is the case, the BBB should either update its systems, or not provide this service. People expect that the "check out a company" feature of the website is accurate, and can give them information about the company in advance of starting a relationship with it.

Here's another guess about the nature of the problem I experienced. Putting on my tinfoil hat, and tuning into potential conspiracies, there's another explanation, or related set of explanations. Maybe the BBB doesn't want to offend member companies (this dealership is a member) so it downplays, ignores, or "forgets" to update profiles of member companies with complaints from the public. Or perhaps the company in question asked/demanded that my complaint not be included in the chart on its profile page. I have to admit that I have no proof of this, as I only have my own case as a reference, but consider this: The BBB is a non-profit organization, which gets its operating revenue through membership fees from companies, and sometimes sponsored arrangements called "Community Patrons". It doesn't get anything from ordinary people. I therefore have to ask: Whose interests does the BBB really have at heart? How can the BBB claim to be impartial, when its closest relations are with businesses, not ordinary people, and it accepts money from many of them? Businesses -- especially those in industries with shaky reputations, such as car dealerships -- treasure associations with the BBB. The sticker in the shop window is noticed by customers and a clean record of no complaints is worth gold.

Whatever the cause of my mysteriously disappearing complaint, my problem with the BBB goes way beyond updating a webpage. The BBB tries to position itself as an intermediary between consumers and businesses and a trusted resource -- its motto, after all, is "Setting the Standard for Reliability, Credibility and Ethics". In my experience, the local office of the BBB has failed on all three points. Is this just an isolated case, or is it indicative of a more widespread problem affecting lots of other people who trusted the BBB with details of disputes with businesses?

"Mirror" 401(k)s for the highly compensated

2005-12-02T08:14:00.001-05:00

This is interesting. At some companies, highly compensated executives -- CEOs, VPs, and other corner-office types -- are granted special 401(k)s to help them salt away more than the $15,000 limit everyone else has to live by.

The so-called "mirror" 401(k)s, also known as spillover 401ks, are a type of deferred retirement vehicle for people who get paid a lot. After the $15,000 limit for a standard 401(k) is reached (for the 2006 tax year), contributions continue into the mirror 401(k) up to an additional $15,000. This money can be withdrawn upon retirement.

That's according to the new IRS rules. Under the old system, withdrawals started at retirement, but executives could contribute as much as they wanted to the mirror 401k.

From a tax perspective, the new system is far more restrictive for people whose salaries are in the hundreds of thousands or millions of dollars. On the other hand, if you're making that much money, you'll probably have a significant cash and investment safety net -- albeit a taxable one -- by the time you retire.

Fidelity management changes, and what it means for you

2005-11-29T08:56:00.001-05:00

There have been a few major changes at Fidelity Investments in the past month. I mentioned one of them in a previous post -- the changing of the guard at Fidelity Magellan -- but there has been another behind the scenes shift in the Johnson family, which founded and controls the privately held corporation. It has implications for anyone whose money is managed by Fidelity.

Here's the background. Edward C. Johnson III is the chairman and CEO of Fidelity. He owns a 12% stake in the company. From 1995 until recently, his daughter Abigail Johnson controlled nearly 25% of the voting stock, with other family members controlling an additional 12% or so (for a total of 49% of voting stock). Even though she is only in her early 40s, she has been promoted quickly through the ranks, and was until recently President of Fidelity's main money management unit FMRCo.

A 25% stake in the company? President of a key business unit within Fidelity? Naturally, these arrangements led many to believe that Abigail was heir apparent in the Johnson family. But that possibility may no longer be in the offing.

Earlier this year left the post of President of FMRCo, and "was transferred" (according to the Wall Street Journal) to Fidelity Employer Services Co., which helps big companies administer retirement plans. Instead of working in downtown Boston, Johnson was now working at a distant suburban office park. Johnson was not happy with the move, which led to some friction with her father, according to sources cited by John Hechinger of the Wall Street Journal. She has since sold some of her voting stock to trusts to benefit younger family members.

But behind the almost gossipy tone of the Wall Street Journal articles on this subject, is a nugget of news that I think is far more important to the millions of ordinary customers who own Fidelity mutual funds: Fidelity is changing its domestic stock research unit and oversight of fund managers. That's why Johnson was transferred to a satellite office in the burbs, with no direct control over how fund managers are picked.

Here's my take: Johnson got to her previous position partially through hard work, but mostly through her name. Nothing suprising there -- that's how lots of family businesses are run. But the performance of the money-management unit was lacking, and that forced Fidelity to shift her out to a less-critical job (despite the claims of the company and herself to the contrary). I don't think the intention was to have her remove herself from the heir-apparent position, but like a lot of other family empires in which top son or daughter is taken down a notch (think Lachlan Murdoch) that's what happened at Fidelity.

And I am glad she's been taken down a notch. Nepotism is fact of business life, but in Fidelity's case, when millions of people's money and futures are at stake, merit -- not last names or relationships -- should be the number one determinant of who rises to key positions.

We're already seeing some of the repurcussions of this move. Stephen Jonas, who took over Johnson's old position at FMRCo, has shaken up the poorly performing Magellan and Growth and Income funds, as well as Fidelity Capital Appreciation Fund, Fidelity Export and Multinational Fund, Fidelity Advisor Growth & Income Portfolio, VIP Growth & Income Portfoli, Fidelity Growth & Income II Portfolio, Fidelity Advisor Large Cap Fund, Fidelity Advisor Small Cap Fund, Fidelity Small Cap Independence Fund, and Fidelity Small Cap Retirement Fund (NB: if you owned these before Nov. 1, I would check the updated prospectii and try to research the new managers and their track records as managers of other funds or as analysts).

Jonas has also supposedly changed the old Fidelity system of doing investment research and choosing managers, whereby young analysts are put on a career track to become fund managers down the road. Outside analysts with good track records will be brought into the company, and kept on as analysts, rather than being promoted to fund managers. I say "supposedly" because at least one recent appointment -- Andy Sassine to the management of the newly created Fidelity International Small Cap Opportunities fund -- was made according to the old pattern (Sassine was an analyst before his promotion). It's not clear how future fund appointments will be made, and whether or not Fidelity analysts are forbidden from becoming fund managers.

Self-employed retirement challenges

2005-11-28T08:55:00.001-05:00

More Americans than ever are running their own businesses, but most don't think they're saving enough for retirement.

An online survey by the National Association of the Self-Employed found that 57% of those who participated said they were not confident about their retirement savings. While half of the more than 400 respondents said they save for retirement, nearly 20 percent do not or are not able to. Furthermore, 28% have no retirement savings, and nearly the same number have less than $15,000. I wouldn't call an online survey on a website an accurate way to gauge the financial condition of millions of small business owners, but I believe the results do indicate that this is an issue for many of self-employed people.

What's the problem? Certainly, the difficulties with getting a new business off the ground are a factor. Many will not turn a profit for a few years, if ever, so keeping the company afloat, investing revenue in growing the business, and paying bottom-line costs and the owner's living expenses take priority. There are retirement accounts for small businesses which correspond to "normal" workplace accounts -- SEP IRA, Simple IRA, etc. -- but what's the point of opening this type of account if there is zero extra cash to put into it?

The NASE website, incidentally, has resources for people who are running their own businesses, ranging from advice on health insurance and taxes to shipping discounts. Find out more on NASE's benefits page.

Retiree regrets: Didn't save enough!

2005-11-24T22:08:00.001-05:00

Here are some sobering stats: 98% of retirees surveyed by Oppenheimer regret how they spent their money before retiring. Among current workers participating in the same survey, 97% regretted "how they and their spouse spent their money considering how much more savings they could have accumulated."

Of course, Oppenheimer is using these numbers to boost their own business (they are another company with baby boomers on the brain), but I think think the first statistic about regretful retirees it is something that everyone should consider, regardless of your current income. The lifestyle you enjoy when you are in your 50s and still working may take a drastic turn in your 60s when you decide to retire and have only your retirement savings, existing non-retirement assets, and social security to depend on.

Experts advise increasing foreign allocation

2005-11-21T08:44:00.001-05:00

I've been doing this on my own for the past three or four years, and lots of other people have been doing the same this year (judging by the massive inflow into international stock funds compared to U.S. funds) but many financial planners and Wall Street strategists are now officially telling their customers to bump up their exposure to foreign equities.

The Wall Street Journal's Eleanor Laise has the story ("Foreign Stocks Get New Push," Nov. 8, p. D1). She says JP Morgan has advised increasing exposure to foreign stocks to 33% from 20%. Standard & Poors investment policy committee has raised its recommended international stock allocation from 15% to 20%.

If you are interested in increasing your foreign exposure, you should consider a few things. First, there is more risk involved, particularly in those markets that do not have transparency in financial regulations or strict accounting rules relating to public declaration of earnings. Second, there are established foreign markets like Japan and Canada, and then there are emerging markets, which are subject to political and economic instability. For instance, a lot of people (myself included) invested in Asian stock funds in the early 90s when prospects there looked extremely good, only to suffer during the Asian financial crisis later in the decade. Right now, some wild cards to keep an eye on are a bird flu outbreak among humans and the potential for social unrest in China, either of which could have a significant impact on international stock markets. Investing in international stocks this decade has so far been very profitable for me, but I am keeping a close eye on these issues.

Jonathon Clements of the Wall Street Journal brings up another point about emerging markets ("Don't Get Caught Up in the Hype Over Emerging Market Investments", Nov. 2, Page D1) and that is that stellar economic growth in a certain market does not necessarily translate to stellar stock market returns. This is something to keep in mind if you want to buy an index fund or ETF that's based on a foreign country's stock market index, but that's kind of a simplistic argument for actively managed funds -- emerging market fund managers don't make purchases based solely on projected economic growth of a particular market, but rather the fundamentals of individual companies and their prospects for growth.

You may already have a lot of exposure to international stocks through your existing mutual fund holdings. A few months ago I used Fidelity's portfolio analyzer to measure my exposure to foreign stocks, and other mutual fund companies offer similar services. After plugging your holdings into these tools, you find that your international exposure is not at the level you'd like, consider a portfolio re-allocation -- but only after carefully evaluating your own appetite for risk, and carefully researching the international funds and fund managers.

Fidelity's retirees service

2005-11-18T07:43:00.001-05:00

As I blogged earlier this week, Fidelity has a retirement planning service aimed at retirees.

The service is called the Income Management Account, and lets retirees divert money from social security, banking, and other types of accounts to what is essentially a Fidelity brokerage account. During the setup process, retirees indicate their spending goals, and the service lets them know as time goes on how well available funds are matching up with those goals. Yo can create email alerts to automatically warn yourself if you start falling behind on your goals.

I'm still several decades away from retiring, so won't be setting up an Income Management Account anytime soon, but this is clearly the way people will manage their money in the future.

Vanguard offers retirement planning calculators on its website, to customers and non-customers as well.

Schwab's fine for $1 million after "investment adviser" forgeries

2005-11-15T17:39:00.001-05:00

This is a very alarming story: The NYSE has fined Schwab $1 million after non-employee "investment advisers" used forged letters of authorization and forged checks. Business Week has the report.

The forgery happened earlier in the decade, and no Schwab employees were involved, but nevertheless the company was fined for failing to supervise and protect customer assets. I couldn't find any other details relating to the incidents or the investigation, but Schwab has "agreed to hire an outside consultant to review its policies and procedures concerning disbursement of customer assets and detection of potential misappropriations," according to the Business Week article.

I suspect that if it happened at one company, it could have very well happened at another, especially on a system based on signatures and account numbers that are shared between investors and their advisers.

401(k) statements that tell you to contribute more

2005-11-15T08:42:00.001-05:00

You. Yes, you. The one sitting there staring at a computer screen. Have you been contributing fully to your workplace 401(k) retirement account?

For many people, the answer is "no." They either don't contribute to their 401(k) plans at all, or, even if they do, they don't put in as much as they should. Jane Kim of the Wall Street Journal says a lot of fund companies are restructuring the statements they send to 401(k) participants, indicating to them that they need to contribute more.

Vanguard's statements (starting later this year) will include estimates of how much money will be available in retirement. Next year, T. Rowe Price is reducing the size of its statements, and including an estimate of how much monthly income will be available to withdraw in retirement.

This is a welcome trend. There are far too many people in this country who don't plan adequately for retirement, either because it's so far away, or they make incorrect assumptions about their assets and sources of funds in their old age. Sending out statements which spell out likely retirement income scenarios will get people thinking, and hopefully contributing, as much as possible.

Fidelity apparently already sends out personal retirement reports every year with this type of information. I've never gotten one, despite being a long-term IRA customer and having a former workplace retirement account through Fildeity, which I turned into a rollover IRA.

I'll post more later about another service offered by Fidelity, that is aimed at retirees.

Fidelity's new tool for the ultra rich

2005-11-14T08:40:00.001-05:00

Everyone is going after the rich customers. No secret there. I see and hear advertisements for "preferred client services", "wealth managent", etc. offered by white-glove firms and brand-name financial services corporations alike. Rich customers are good customers to have.

But there's rich, and then there's ultra rich -- people with $75 million or more in assets. Someone with $75 million won't be worrying about mobile phone bills, or cutting cable TV. People like this have money to burn, and are probably way too busy to manage it effectively on their own.

Or are they? Fidelity is rolling out a new "family office" service next year aimed at families with $75 million or more, which will allow them to track all of the accounts and investments, ranging from art collections to vacation homes. The service will apparently allow permissions to be set so the family head can see all of the assets, but children, trustees, and accountants can only see part of the picture.

It's not clear how this family office platform will dovetail with Fidelity's existing services and products, or how much it will cost.

The service will apparently be released in late 2006, according to the Wall Street Journal.

Defense stocks in retreat -- boo hoo

2005-11-11T08:54:00.001-05:00

Renae Merle of the Washington Post reports Defense Department budget cuts may mark the end of good times for the defense industry:

"The stock of Lockheed Martin Corp., the Pentagon's largest contractor, is down 5 percent since August, despite a third-quarter profit of $427 million. Shares of Northrop Grumman Corp., the maker of submarines and satellites, have stayed flat despite a profit of $293 million during its last quarter."

Moreover, stocks of smaller and mid-sized contractors who specialize in IT and electronics have high valuations, according to JP Morgan research cited in the Washington Post article:

"'As we believe defense growth will slow to near-zero in 2007, we do not believe these companies will sustain the double-digit top line growth that their managements and investors are targeting,' the [JP Morgan] report said."

Is any of this surprising to people? Iraq has turned into a quagmire for our military, despite the claims of Dick Cheney and Condi Rice to the contrary. Hundreds of billions have been sunk into fighting this war with no end in sight. Big-name companies with powerful friends such as Halliburton have been furiously overcharing the government to provide war-support and construction services (and $45 cases of soda pop, $100 laundry bags, ad nauseum). And, not surprisingly, people are asking what the heck we're doing over there if the WMD "evidence" was a bunch of lies by Washington hawks who wanted war.

Congress has to respond to these concerns, and will put pressure on the DoD to scale back its spending ambitions. I feel terrible about the soldiers and innocent people who have been caught up in the mess in Iraq, but will not be shedding a tear for the defense industry.

Fund pain in October

2005-11-11T08:16:00.001-05:00

I just received my Fidelity statements for October, and boy, did our accounts get hammered! The total loss was just under 4%, although the pain seemed to be deeper for international stock funds (all Fidelity funds, plus one international ETF) than for our Fidelity domestic stock funds.

It's not a Fidelity problem that caused the decline. It's a broad market problem -- namely, worries over inflation -- and lots of peoples' fund holdings suffered, regardless of the fund company.

Many on Wall Street (and other markets, too) are worried about U.S. inflation and the effect on interest rates. Oil prices were already high when late-season hurricanes creamed the Gulf of Mexico and the energy industry facilities there, which contributed to the hand-wringing. Stocks that are sensitive to higher interest rates (financial stocks, makers of high-end consumer goods, etc.) were hard hit, but, as we have seen in recent Congressional testimony, that didn't stop the energy companies from declaring tens of billions of dollars in profit.

So far this month, there has been an upturn, which has reversed the slide in most of my fund holdings. I am hoping for (but not counting on) a year-end rally, as well.

Fighting subscriptions III: Communications -- mobile phones

2005-11-10T07:51:00.001-05:00

Today Fidelity Observer continues the discussion about cutting subscription costs -- this time, those mobile phone plans that cost most of us at least $360 per year, and some well over $1000/year.

Mobile phone charges are a huge subscription cost for tens of millions of people in this country. A standard mobile phone subscription will set you back at least $30 per month, $360 per year, and you are locked into a one or two year contract. I see that Cingular's cheapest "Plan" is $40/month, and has one plan that goes up to $80/month, or $960/year.

Oh, these costs do not include the cost of a handset, or those extra fees that inevitably show up on our bills. The San Francisco Chronicle this week had a story about users (mostly young people) who run up $100 monthly mobile phone bills with add-ons including games, ringtones, email alerts and text messaging.

Nonetheless, there are mobile phone packages that can save you a lot of money, *if* you don't use them often. We don't. I sometimes call family or friends when I am outside or on the road on business, but it has never totaled more than 60 or 70 minutes in a month -- certainly not worth a $30/month subscription!

Instead, I have a pay-as-you-go (aka "prepaid") plan. I pay $25 for 100 minutes that last three months -- and if I renew before the 90 days is up, any remaining minutes carry over (I have an alarm on my palm pilot that reminds me every 89 days, and as a result now have 250 minutes on my account). I have the convenience of a mobile phone and pay just $100/year. This won't work for people who live on their phones, but if you are an infrequent user, this is a good deal.

Also, there are a lot of people out there who think they need to have the latest and greatest handset or in-ear gadgetry. I have to ask: is the camera, texting ability, and video playback worth it? A phone can't carry out these functions efficiently, and I've noticed that carriers use them to justify higher-priced plans. I am not advocating digging that circa 1993 brick out of your closet, but don't toss 2003-era handset away because it doesn't have Bluetooth. You can still get by with an older model to conduct basic phone services, and save yourself some money in the process.

Fighting subscriptions III: Communications - land-line phones

2005-11-08T07:45:00.001-05:00

Last week Fidelity Observer introduced a series on fighting subscription costs. I first discussed entertainment-related subscriptions -- telephone, Internet, and publishing (television and radio are grouped under entertainment).

Today I will start my discussion of communications-related subscriptions, and how you can reduce the costs involved, starting with ordinary-land line telephones (mobile phones, internet charges, and publishing subscriptions will come later).

Telephone subscriptions are the most common communication subscriptions, with most households having at least one fixed line and likely at least one mobile phone subscription as well.

Traditional telephone companies have had a lucrative racket going for many years. Looking at my own Comcast phone bill, I see the following monthly charges:

Residential Line: $18
Non-local in-state service: $1
International plan: $3
Two-feature charge: $6
"Subscriber Line Charge": $6.44
"Universal Connectivity Charge": $1
Taxes and surcharges: $2.34

This comes to almost $38, and doesn't include individual charges for in-state or international calls. Over the course of one year, this base land line subscription comes to more than $450. I've lived in my current house for just under five years, and have paid more than $2000 in base phone charges in that time -- not including in-state, long-distance, or international calls!

It is not unreasonable to assume many households have phone services that cost a lot more than $450, especially if lots of international calls or multiple mobile phones are involved.

But it doesn't have to be this way.

For basic land-line service, you can't get rid of the "subscriber line charge" and taxes, but you can certainly pare down little-used or unnecessary add-ons. Voice mail through Comcast costs $60/year, but you can buy a new telephone with a digital answering machine and message saver for about $20 -- the model I have lets me access the messages remotely, just like real voice mail.

The "Two-feature package" is a real ripoff. Comcast knows most people don't care about call waiting, but need Caller ID to screen for telemarketers and unwanted callers. They therefore "bundle" them together, forcing you to pay $72 for a service that costs them next to nothing to operate. I pay the fee because I can't stand telemarketers, but cutting my "Two-feature package" would save $72 per year.

For international phone calls, we use those phone cards that are sold in convenience stores. Immigrants swear by them, and no wonder -- a $5 phone card gives us three hours of talk time to Asia, where we call a few times every month.

However, we still keep the in-state phone service and international service. I work outside of our home's local calling area, and we have several elderly relatives who live abroad, and don't want to depend on phone cards or mobile phones if there's an emergency or need to make sure the connection is clear.

We also don't want to discard the land line in favor of a mobile phone -- God forbid there's a fire or other emergency, and we can't find the phone, the battery is dead, or we have to wait for a good signal.

In the next installment, I'll pass along some tips for cutting mobile phone charges.

Life insurance rates dropping in 2006

2005-11-07T08:16:00.001-05:00

If you're thinking about getting life insurance for the first time, replacing your existing policy, or expanding coverage, you might want to wait a few months. The Insurance Information Institute says rates for life insurance will be headed down three percent in 2006, thanks to competition, better industry efficiencies, and "significant mortality improvements" (i.e., people are living longer).

Rates have been headed down for years, but when you compare just how far they've come, it can be quite jarring: The III says the annual premium for a 40-year-old male buying a $500,000 20-year level term life insurance policy in 2006 will be $641 if he qualifies as a “standard” risk and $352 if he meets the more stringent requirements of a “preferred” risk. This year, the rates are $660, and $375, respectively. In 1994, the same policy for that age group would have been $1,300 for standard, $996 for preferred, representing drops of more than half over a 12-year period.

Shake-up at Fidelity Magellan

2005-11-04T08:58:00.001-05:00

Big shake-up brewing at Fidelity's Magellan fund. Bloomberg's Chet Currier reports the current Magellan manager, Bob Stansky, is leaving, to be replaced by Harry Lange, the manager of Capital Appreciation and Fidelity Advisor Small Cap.

A change isn't surprising, considering the fund has lagged in recent years (see the Fidelity Observer post from September about this) and nearly $12 billion has been withdrawn from the fund so far this year. The Bloomberg article suggests that Lange might place more of a small-cap emphasis on Magellan, which has traditionally gone after "big" stocks.

Fighting subscriptions II: Entertainment, from cable TV to XM radio

2005-11-04T08:24:00.001-05:00

This is the second installment of my series on subscriptions, and how they can be reduced or better managed to save you money.

Entertainment-related subscriptions dominate American lives, largely through our television sets. Cable penetration totals 66 million subscribers, satellite television, 23 million. There are also DVD-rental services, ranging from Blockbuster ("tens of millions of member accounts", says its website) to Netflix (3.5 million subscribers).

And then there's music: Nearly nine million people subscribe to XM and Sirius, two satellite radio services. Millions more subscribe to Rhapsody, an online music downloading service. (I'm leaving general Internet browsing out of entertainment-related subscriptions, and will discuss this in a separate post on communications)

The services listed above are not cheap. This is what a typical non-intro offer subscription to entertainment-related services will cost, not including equipment fees or other non-subscription costs:

Basic cable: $7-$10/month, $84-$120/year
"Standard" cable: $40-$45/month, $480-$520/year
Premium movie channels: $12/month, $144/year
Satellite TV: $20-$50 per month, $240-$600/year
Netflix: $15/month, $180/year
Satellite radio: $13/month or $156/year
Rhapsody: $10/month or $120/year

(Note that hardware costs can be significant. Satellite receivers for television and radio can cost up to $300. Cable boxes can also be expensive, although some services waive hardware and installation charges.)

Many people subscribe to one or more of these services -- for instance, Netflix and standard cable. It's not unreasonable to assume many people are spending well over $500/year on entertainment subscriptions. There are millions who have been cable subscribers for decades. If you fit into this category, you've probably blown at least $4000 in the last ten years on cable, and perhaps as much as $8000 if you subscribe to movie channels.

And ask yourself: has it been worth it? I don't dispute that there's some great quality programming on cable, satellite, and other media. And it is convenient to get it delivered to your living room and car.

But at what point do these subscriptions become redundant, or overkill? Do we really need hundreds of digital channels of television programming, or satellite radio that gives us a wider range of talk radio for our commute? These companies justify their pricing by saying they bundle dozens or hundreds of channels into one convenient package. But really, how many channels or programs do you really watch?

Furthermore, if you live in or near major urban centers, you can already get good over-the-air programming for free. Lost, Desperate Housewives, Howard Stern, All Things Considered, American Idol, Letterman, and local sporting events cost nothing with an ordinary television or radio.

As for movies, local libraries rent DVDs for a buck a week in my community, and you can reserve titles online. Unless you watch more than 10 movies per month, HBO or Netflix doesn't seem like such a good deal by comparison.

In terms of music, most newer cars have CD players, and you can also hook up your iPod to your car stereo with a $30 device -- does XM or Sirius really add much more in the way of music or other programming?

I think if you take a hard look at your current line-up of entertainment subscriptions, you may find that the idea of cutting cable service, or canceling the Netflix subscription isn't a great loss. You have other, cheaper alternatives, and the resulting trimming of excess or redundant entertainment services can save hundreds of dollars per year.

In the next installment, I'll take a look at cutting back communications-related subscriptions -- phone service, Internet access, and media subscriptions.

AARP eases onto the baby boomer bandwagon

2005-11-03T07:58:00.001-05:00

On the heels of my posts about Ameriprise and Fidelity actively targeting the 76 million baby boomers entering retirement, I see news that AARP (formerly known as American Association of Retired Persons) is also changing its services and strategies, to take into account this attractive demographic.

Claudia Deutsch of the New York Times notes that the organization has just created AARP Financial Inc., which will offer a range of financial products and services for members. One service is an "investment fund" aimed at people over 50 (couldn't find the link), and the organization has also partnered with Scudder to offer 38 mutual funds to AARP members.

Fighting subscriptions and saving money, part I

2005-11-02T08:33:00.001-05:00

Everyone subscribes to something. The obvious subscriptions are those that are called subscriptions -- newspapers, magazines, newsletters, Netflix. Pay X dollars per year or per month, and you get the service in return.

Then there are "accounts" or "memberships" that are actually subscriptions to services: Power, gas, cable TV, mobile phone service. People are usually locked into these via contracts or necessity. You pay a fixed rate every month, except for utilities, where the rate changes from month to month, depending on usage.

Finally, there are those products that also work according to a subscription model, but are not obviously subscriptions -- until you consider that you have to pay a tidy sum every few months or so to continue using the product. Razor blades and printer cartridges are my favorite examples -- $3 for a replacement razor blade, $25 for a printer cartridge. Owing to patents and proprietary technology, what I call "goods subscriptions" operate in a near monopoly environment -- you either suck it up and pay for an expensive refill, or buy a competitors' product which has similarly expensive refills. Re-using the cartridge, sharpening the razor, or buying generic versions of these products is usually not an option.

Whatever the type of subscription, corporate America loves them. Companies get a guaranteed revenue stream, lock customers into their service or product lines, and after a certain point profit heavily from the relationship, often for a period of many years.

Over the next few weeks I'll be examining subscriptions, and how you can cut some of them out of your life, or at least reduce your dependence on them. It's not as hard as you think, and in the course of a single year, you can save several hundred dollars.

Credit card air miles: advice needed

2005-11-01T08:14:00.001-05:00

I am going to take the plunge sometime in the next month, and sign up for a credit card that lets me build up air miles in a frequent flyer program. My family charges about $15,000 per year on our USAA non-points credit card, and the idea of getting frequent flyer points for these purchases is very appealing: We have two young kids, and travel overseas once every two years to visit relatives, so some relief on ticket prices is really needed.

Some of the questions I have about cards pertain to rates and fees. While we don't carry a credit card balance over to the next month, you never know when an emergency or exceptionally expensive month may come up, so base interest rates for points-based cards and the conditions under which higher rates kick in are important.

Additionally, I am against the idea of paying an annual fee for a credit card. A few years ago, I severed a long relationship with American Express after getting ticked off by the annual fee they were charging, and refusal to lower or eliminate it. I wonder if there are points-based cards which do not have fees?

A third consideration is flexibility. I know many airlines offer points-based cards, but naturally you are locked into that frequent flier program. Do non-airline credit cards give more choice? What about expiration of credit card-generated frequent flier miles? Do they expire after a year, if they are not used?

Any advice from readers about frequent flier card programs would be greatly appreciated!

Tracking U.S. savings bonds

2005-10-31T07:21:00.002-05:00

You know grandpa had a few old savings bonds stashed away somewhere, but did he cash them in before he passed away?

Now you can find out, if he used his social security number on the bonds, the bonds are no longer earning interest, and you have access to the social security number -- or if it's your own social security number, and you want to see if you've cashed a bond you bought years before.

The Department of the Treasury runs the service, which you can access here. Click on the start search link, and you'll be asked to enter a social security number. Note the following:

* This system won’t help you search for savings bonds you've lost.
* Savings bonds returned to Treasury as undeliverable since 1996 can be found by searching this system.
* Information about savings bonds no longer earning interest is updated often, but is incomplete, because data on older bonds is stored on microfilm instead of computers. Since you may have savings bonds that aren’t listed in Treasury Hunt, be sure to look through your belongings.
* Most records for registered Treasury notes and bonds can be searched through this system.

The Pittsburgh Post-Gazette has more details.

Cashing out a 401(k) - why?

2005-10-28T08:33:00.001-04:00

Interesting stat, spotted in Kiplinger's: 45% of 401(k) participants cash out the balance when they leave their job. There is no explanation why so many people make this unwise decision, but I have a few suspicions:

1) There's not much money in the 401(k) account. For younger workers, a 401(k) with just a few thousand dollars doesn't seem worth rolling over, especially in light of college loans, living expenses, and retirement four decades away. In the case of older workers, such a small amount may not seem worth rolling over, as it won't have as much time to appreciate in value, and other necessary expenses are calling (see next point)

2) People need the money. The money might be needed for an emergency, or necessary expenses -- legal fees, college costs, debt repayments, healthcare, car repairs.

3) People don't understand how a rollover works, or the tax hit from cashing out. Lots of people are turned off by financial paperwork. That's no excuse, but it's just a recognition that the processes involved are hard for some to understand, or too much of a hassle. The tax repurcussions of cashing out may also be underappreciated -- until April rolls around, and they find that they owe money to Uncle Sam for cashing out a 401(k).

4) People are greedy. I hate to say it, but there are people out there who live according to short-term materialistic whims, and see a 401(k) account from their last job as a pot of money that can be used on a flat-screen TV, new car, or shopping spree.

5) The new job's benefits seem to counterbalance cashing out an old job's 401(k). You've just been hired by a new firm, which comes with a better title and a higher salary. Therefore, cashing out the old job's 401(k) might not seem like such a big deal.

6) Why bother? There's an additional reason that I heard from a friend: he cashed out his 403(b) (like a 401(k), but for employees in the the public sector jobs and nonprofits) because his parents are rich, and he anticipates inheriting a lot of money.

Except for certain scenarios outlined in point no. 2, none of these reasons seem compelling enough to me to justify cashing out. But still, millions of people do it every year. You can't force them to be more responsible, only hope to educate them about the benefits of investing as much as they can in their 401(k)s and IRAs. Social Security isn't enough to retire on!

Performance-based mutual fund fees

2005-10-27T07:31:00.001-04:00

I wasn't aware of this until the Wall Street Journal pointed it out earlier this month, but a lot of mutual fund companies tie fund-management fees to performance. Fidelity, Vanguard, Ameriprise and USAA have this policy for many funds, and Janus has just proposed using performance-based fees for 13 of its 59 funds, according to Jane Kim of the Journal ("Incentive Fees' Mixed Blessing," page B4, October 8-9, 2005).

On the surface, it sounds like a good idea. A fund that is doing poorly compared to some benchmark will take mercy on its investors by lowering fund management fees. For instance, Fidelity Contrafund's management fee can range plus or minus 0.2%, depending on its performance relative the S&P 500 index.

But Kim points to some reasearch which suggests this may not be such a good idea. While funds with performance-based fees tend to have lower fees than other funds, this system "... creates an incentive for managers to take on more risk--especially if the fund is doing poorly ..."

From my point of view, low fees are important, but that's scant comfort if they tend to be associated with poorly performing actively managed funds.

Additionally, while Fidelity is trying to claim it has low fees on many of its funds, TIAA-CREF, which along with Vanguard is considered the champion of low fees, now wants to raise fees for its actively managed funds. Many of them are notorious laggards, but TIAA-CREF claims this is a necessary step to avoid closing some of their funds or merging them with others.

Kiplinger's turning a new leaf?

2005-10-26T07:30:00.001-04:00

I have a love-hate relationship with Kiplinger's magazine.

I love some of the practical advice about money, credit, and insurance. It is through Kiplinger's that I learned about the availability of free credit reports for residents of my state, which I now order by phone every year. I also learned some tips to shave a few hundred dollars from my annual auto insurance bill. I also use Kiplinger's to keep up with reviews of tax preparation software.

But Kiplinger's has a bad side as well. I've highlighted some terrible mutual fund reporting in Kiplinger's, like this nonsense about Fidelity's International Small Cap Opportunities fund. I'm also sick of the incessant car-related articles, which in my opinion are intended to make the magazine popular with auto manufacturers' advertising agencies.

However, the latest issue of Kiplinger's (November 2005) is different. There is not a single fluff piece on mutual funds, or mutual fund managers (well, actually there's one, but it's very small -- only a few hundred words long). And while there is a car-related article, for once it's not a buying guide, but rather a practical resource about getting the lowest price on a car via the Web ("No hassle car buying", by Mark K. Solheim.)

The reason for the absense of mutual fund fluff is mystifying. Is Kiplinger's turning a new leaf? I suspect not. The lack of mutual fund articles probably has more to do with the special report on real estate (four long articles about real estate) than a desire to reform editorial coverage of mutual funds, a major advertising segment of the magazine. We'll know for sure when the December issue comes out.

Fidelity's deceptive advertising, part I

2005-10-25T07:29:00.001-04:00

I'm looking at a Fidelity advertisement in the latest issue of Kiplinger's (the second page spread in the November 2005 issue). It's amazing how deceptive it is. "Add staying power to your portfolio," and "Experience, value, and a focus on long-term performance set our funds apart" reads the ad. To back up these come-ons, the text notes that Fidelity offers "more 4- and 5-star funds than anyone else."

But wait. There's a footnote. Reading the fine print, the advertisement notes as of 7/31/05, 76 out of 146 funds were rated four or five stars by Morningstar. Turn that statistic around, and we find that 70 Fidelity funds, or nearly half, are only rated 1, 2, or 3 stars. That doesn't sound too promising!

There's more to this advertisement that I find disturbing. At the center of the page is a little chart which shows the great 1, 5, and 10 performance of three funds (Fidelity's Contrafund, Export and Multinational Fund, and Balanced Fund), which look super when compared with the S&P 500 Index benchmark. I don't dispute the performance of these funds, but again, this advertisement is highlighting the winners, and not the losers. Why isn't Magellan up there? Because it would totally contradict Fidelity's claim to focus on long-term performance, as its performance does not beat the S&P 500 index.

I also have to ask if the S&P is an appropriate benchmark for Contrafund and Fidelity Export and Multinational Fund, which have investments in foreign equities and companies not in the S&P 500.

One last criticism: The chart compares the funds and the benchmark as of 6/30/05, whereas the "more 4- and 5-star funds" claim is based on data as of 7/31/05, one month later. Why the disparity, and why aren't they using more recent data, such as the measures from 8/31/05? It's because the data from the end of June is a better comparison for the three Fidelity funds vs the S&P, the end of July is a better date for Fidelity for the Morningstar rankings, and I am assuming the August data is worse for both points of comparison.

Hype and the use of selective or misleading statistics have taught me to view Fidelity advertisements with extreme caution. Never make an investing decision on the basis of an advertisement like this -- you should always take a few hours to do some serious research before investing in a Fidelity fund. Examine fees, take a look at the prospectus, and learn about the management team before taking the plunge.

Personal Finance tips

2005-10-24T08:35:00.001-04:00

I write about personal finance journalism quite frequently. I've praised the Wall Street Journal, panned Kiplinger's, and highlighted articles in various local and national publications.

Yesterday I had a chance to review the Orlando Sentinel's "Your Money" section (the Sunday, October 23, 2005 issue), and was very impressed with what I saw. On the front page there were loads of tips that you could use to save money on health insurance and telephone service, plus a prominent pointer to another page where all the local bank rates are listed. The phone recommendations were particularly interesting. I'd heard of Skype (a free Internet phone service) but didn't know about two other services listed by the Sentinel, 1-800-FREE411 (a free directory assistance and calling service) and www.celltradeUSA.com, which lets you transfer a cellphone contract to someone else for a $20 fee -- a great service for those that want to back out of a long cellphone contract.

The Orlando Sentinel also dresses up the front page of Your Money with graphs, charts, and bullet points to illustrate trends in the marketplace. This is ripping a page from USA Today, but it's very effective.

Old-school investors who prefer the long-form personal finance articles in the Wall Street Journal, New York Times, and Boston Globe may cringe, but the editors at those publications need to realize that lots of people don't have the time to read a 1000-word article, and want to get useful information fast. This is especially true of younger people, who may be used to getting news and information in short bites, a la the Internet and television news.

The Orlando Sentinel archives a lot of tips and articles at OrlandoSentinel.com/yourmoney. I highly recommend checking it out.

Hedge fund vs mutual fund rating system

2005-10-21T08:34:00.001-04:00

Hedge funds are back in the news again. And some people have a new idea: why not create a rating system for hedge funds, like we already have for mutual funds?

On the surface, it seems like a great idea. Hedge funds are mysterious investment vehicles, conducting risky and complex trades in order to achieve their aims of giving high rates of return to mostly rich investors. Many fail, as we learned with the recent Bayou scandal. Wouldn't it be super if investors had a rating system to guide them to well managed and well performing funds, and help steer them away from the stinkers?

Yes, it would be super. But it wouldn't work. Mutual funds are heavily regulated, work according to similar investment strategies (i.e., usually investing in equities and bonds) and are required to state their returns, fees, and other information on a regular basis.

Hedge funds operate to a completely different set of rules. They are not regulated (except for a newly proposed rule which require managers to register with the SEC) and are under no obligation to state their returns to anyone. And it is not easy to compare them, owing to radically different and complex investment strategies.

But there are people out there who want to create a hedge funds rating system. Morningstar, the company which has a mutual funds rating system, is giving it a shot. Critics, however, point out that these systems depend on hedge funds voluntarily disclosing their returns, or what they claim are their returns. Additionally, potential ratings firms might be reluctant to give a bad rating to a poorly performing hedge fund, fearing that the fund may stop reporting results, which would call into question the accuracy and impartiality of the system.

Stay tuned, this is a hot area in investment circles, which deserves more scrutiny ...

Baby boomers: They want your money!

2005-10-20T07:28:00.001-04:00

A few weeks ago I blogged about Fidelity's new pitchman, Paul McCartney, and how he was chosen for his appeal to the baby boomer generation, the people born between 1946 and 1964.

Other financial services companies are going by the same playbook. In a subway station two days ago I saw an Ameriprise ad pitching financial services to the same demographic group, using a lot of the nostalgic visual symbols that are supposed to appeal to boomers: peace symbols, 60s and 70s clothing and hairstyles, an old yearbook photo of a man from the early 60s, and even some icons from the early 80s, punk rockers, intended to appeal to the youngest segment of the boomers. Ameriprise (not to be confused with Ameriquest) used to be American Express Financial Advisors.

But don't let feel-good symbols lure you into doing business with any company. Doing upfront research about a company can tell you a lot about the aims of the company, its services, as well as potential problems.

Wall Street Journal features

2005-10-18T20:57:00.001-04:00

Have you seen the revamped Wall Street Journal recently, like in the past month or so? It's really good.

The most obvious change is the Saturday edition. The new Saturday issue ("Weekend Edition") has similar leisurely features (on the front page, and in the new "Pursuits" section) as well as wrap-ups from Friday's finance markets, investing, and hard news. I have seen some pundits pan the Saturday edition (the first issue was a yawner, apparently) but I've read every Saturday issue since then, and I think it's great.

But there are other changes, too. The regular sections have tweaked the formulae they use for news and markets coverage for instance, bumping up the prominence of career-related articles.

Additionally, the Monday issue has a great new front-page feature, "What's Ahead." This is a prominent roundup of expected news and financial issues in the week to come -- court trials, earnings reports, the release of economic data, and elections. How come they didn't think of this before?

We hear a lot of whining from traditional press about how they can't compete in a new media environment, but I think the WSJ is on the right track. They're not just clawing after the latest trend -- podcasts, portals, or whatever. They are actually evaluating what people like best about the existing product and adjusting the product accordingly, as well as adding new features that people seem to appreciate.

I have access to both the electronic and print versions, but I really prefer the print version -- it was a great read to start with, and the new features make it even better.

SEC hedge funds regulation problems?

2005-10-16T10:45:00.001-04:00

In August I blogged about hedge funds, the risky investment vehicles for rich people which have received a lot of scrutiny following the collapse of the Bayou Group after alleged massive fraud.

Hedge funds weren't strictly regulated before, but that may be about to change: A few weeks ago the new SEC chief, Christopher Cox, told the Wall Street Journal he intends to implement rules that would give more government oversight over hedge funds. One of the main points of the new rules would be to have hedge fund managers register with the SEC as investment advisers by Feb. 1.

However, there is some controversy about the rules. Significantly, it's not certain they'll prevent Bayou-type frauds. Additionally, and senior executives within the SEC are apparently opposed to the rules, owing to budgetary and staffing issues within the SEC, and a view that the rules may be difficult to apply to the complex and unique trading schemes hedge funds employ.

How well do you know the markets?

2005-10-13T11:54:00.001-04:00

This is cute: A website that lets you compete to see how well you know the markets. It's called Consensus View, and it works like this:

Are the Many Smarter than the Few in the Financial Markets?

Inspired by the book "The Wisdom of Crowds" by James Surowiecki, www.ConsensusView.com was launched to find out whether the idea that the many are smarter than the few can give traders an edge in the financial markets.

The website allows participants in the Stock, FX and Futures markets to forecast the direction of the markets and in return see the consensus view of where a market is heading. Participation is free and there is $12,000 of prize money for the best forecasters, with a further prize of $250 for the person that referred them to the site.

As I see it, there are two elements of this site that are worth noting:

1) You can see the aggregate expectations of participants (pros and amateurs) toward markets sectors (S&P, Gold, etc.). Of course, this doesn't mean the markets will move in the direction a majority of people say they will.

2) You can join the competition and try to win the monthly prize of $1000, based on how well you call the direction of different markets, compared to everyone else playing.

It's free, so if you have some time on your hands, and want to see how you stack up against other market pundits, give it a shot.

Fidelity's lower fees mantra

2005-10-12T08:06:00.001-04:00

You've probably noticed that Fidelity fees have been inching down for certain products. Last month Fidelity offered two new annuity products, Personal Retirement Annuity and Freedom Lifetime Income, which feature competitive annual management fees, compared with other annuity products.

Also, right now on the front page of Fidelity.com, there's a big banner proclaiming the elimination of the $50 brokerage account management fee.

Why the unexpected largesse?

Three words: New opportunities and competition. (Well, that's actually four but "and" is just an article and .... oh never mind)

The new opportunities are in annuities. Low-fee annuities have been the domain of Vanguard and TIAA-CREF, which savvy investors know. Fidelity is apparently trying to muscle in on their turf.

Competition consists of the discount brokerages (Schwab, Ameritrade, etc.) which have been slashing trading fees in a bid to get business. Fidelity has also cut fees, but by eliminating the annual brokerage fee they can appeal to an even wider swathe of the population. Even if they are low-margin stock trading accounts now, Fidelity reasons they may be rolling over IRAs or buying mutual funds later.

Managed ETFs?

2005-10-11T07:26:00.001-04:00

It's true. Exchange-traded funds mimick common domestic and international benchmark indexes (S&P 500, Nikkei, etc.) and can be bought and sold throughout the trading day -- unlike mutual funds, which can only be bought and sold at the end of the day.

However, in August two companies, Managed ETFs LLC and ManagedShared Trust filed with the SEC to start a range of actively managed and index-based ETFs. It's not clear if the products will be approved by the feds, but if they are, they will open up a new line of business for financial firms that will surely take some business away from traditional mutual funds.

Questions remain about the tax benefits and transparency of the proposed actively managed ETFs. Stay tuned ...

Mutual funds, economic trends, and chasing returns

2005-10-10T07:09:00.001-04:00

Very interesting article in the LA Times by Josh Friedman (via Yahoo News), talking about sector trends in the stock market, and what it means for mutual fund investors.

The article touches upon all of the issues that mutual fund investors should care about -- diversification, the risk of chasing hot funds or market sectors, and global economic issues and their impact on world stock markets. If you've invested in traditional U.S. stock funds, you've missed out on growth in international markets and commodities. But who knows how long those streaks will last?

One financial advisor quoted in the article stresses diversification:

Even if single-digit returns end up being the rule on Wall Street for years to come, financial planners say a disciplined approach to deploying their clients' assets among different investment categories can squeeze out extra returns.

The process "is counterintuitive, but works," said planner Cynthia L. Conger in Little Rock, Ark.

One client of hers, with a 5% allocation to the natural resources industry sector via the Vanguard Energy fund, recently saw that holding shoot up to nearly 7% of his portfolio in less than a week thanks to the oil boom. Conger sold enough shares of the fund to get the weighting back to 5%.

"It's a disciplined method for harvesting gains," said Conger, who noted that the fund zoomed 49.7% in the first three quarters.

"Most people want to hold on to things that have done well," she said, "but this way you're forced to sell high and buy low, and in the long run that's how you can outperform the expectations."

The article also discusses immediate return annuities:

An immediate annuity offers a payout stream like a traditional company pension upon retirement. The investor puts up a lump sum in exchange for regular monthly payments guaranteed for life.

Because those payments are based on interest rates at the time of purchase, Garrett said she would consider waiting a year before making at least part of an immediate annuity purchase. Garrett said interest rates could be higher a year from now, meaning an investor might be able to lock in a better payout rate.

One subject that doesn't get much attention in the article is index funds. I think they have their place, especially for investors who don't have the time to conduct their own research, or tend to not monitor the performance of actively traded funds.

Tip: Limit orders revisited

2005-10-07T07:03:00.001-04:00

A few weeks ago I discussed limit orders, and revealed that I had used Fidelity.com to make a limit order to buy a certain stock when it dropped below a certain price. At the time, the limit price was about 15% less than the market price. The reasons for doing the trade in this manner included a desire to get a discount on the price of the stock, to temper my enthusiasm for buying the stock, and also to give myself a chance to back out if I decided later that even the discounted price wasn't a good buy (Fidelity lets you attempt to cancel an outstanding limit order).

Well, yesterday the stock slid past my threshhold, triggering the purchase. The limit order transaction fee: $10.95 (I am a "Silver" trader)

The stock in question is a depressed airline stock that frankly can't go much lower. I am taking a risk by buying it. The airline industry has experienced huge problems in the past few years -- overcapacity, terrorism, increased competition from new companies and international carriers, high labor and benefits costs, and fuel prices which are more than double the level of five years ago.

On the other hand, the U.S. government and financiers have shown a willingness to assist the struggling industry. Additionally, my investment is just a few hundred dollars, so that's the most I can lose. I am also confident the management of this particular company can turn things around. I use my.yahoo (a personalized portal on Yahoo.com) to monitor news about the company, and it seems that they are serious about cutting costs, paring unprofitable routes, and positioning themselves for a rebound in travel on a sustainable business plan.

I may end up setting up a sell limit order to unload the stock when it rises past a certain percentage level. If I owned a large dollar amount of the stock, it would probably be after a 20% or 30% rise, but seeing as this stock is so cheap, my sell limit would probably be more than 100% of the current price. I'll keep you posted.

Poor 401(k) management

2005-10-05T17:56:00.001-04:00

I really trust Fidelity, and my IRA administrators (ING Retirement), too much. I assume that they are handling my investments according to my directions. However, in recent months I am not so sure.

Check out this item from today's Wall Street Journal, by Arden Dale, which describes an incident involving a Delphi 401(k) plan managed by Fidelity:

Delphi discovered during a recent audit that the 401(k) plan had continued reinvesting dividends in a fund holding General Motors Corp. stock for four years after it was supposed to have begun redirecting those dividends to an income-oriented fund. Over that period, GM shares performed far worse than the intended destination, the Promark Income Fund.

The article notes that the mistake was costly for some Delphi participants:

David Kudla, a financial adviser in the Detroit area, says the affected Delphi employees among his clients were all hurt, not benefited, by the 401(k) error. One individual is due a credit exceeding $3,600 and another more than $4,800, he said.

I recently was rehired by the company I worked for in the early part of this decade, and found that ING Retirement had not properly sent the first three months of my 401(k) contributions this year to the new designations I made upon being rehired -- instead they stuck it in the old funds that I used to own in the 401(k) prior to 2002. When I discovered this, I calculated how much I should have made in the three month period, and compared it to what actually accrued under the misplaced allocations. It was almost the same, so I let it go. But if it was a loss of more than $100, I would have fought them on it, using a copy of my contribution allocation sheet from the beginning of this year. Additionally, I went online and made the changes on my own right away.

The moral of the story: Pay attention to your 401k allocations, what funds you are supposed to be invested in, and what investments those funds make. And keep your records of transactions, sign-up sheets, and other documents. It could save you money and headaches later on.

Fidelity's baby-boomer pitchman: Paul McCartney

2005-10-04T17:49:00.001-04:00

Paul McCartney is the new "face" of Fidelity Investments, reports the Celebrity Cafe.

His reason for signing up for the gig:

“We have a lot in common--a commitment to helping people, a dedication to the arts, and a belief that you should never stop doing what you love."

Yeah, right. I am sure he also gets a boatload of our money, plus gold trader status for life -- that is, if he holds American citizenship. If he is still a British subject, maybe he'll only get the money.

But I digress. I am remarking on this because it is a pretty savvy move on Fidelity's part: We have several tens of millions of baby boomers hitting retirement over the next two decades, and these people -- many of whom are financially well off -- need advice, accounts, funds, and more. Paul McCartney, who as a member of the Beatles is known to practically every American teenager in the 60s and 70s, has icon status for the baby boomer generation. And as a working musician, he's still cool -- even if he's sucking up the suits in his old age.

I suppose this means my generation ("X") can look forward to Lenny Kravitz or P Diddy to be the Fidelity Spokesperson of tomorrow. Oh, wait, we don't have any universal icons. Or does Bart Simpson count?

What are the rules on fund timing?

2005-10-03T08:47:00.001-04:00

You may remember the mutual fund scandal in 2003, in which a small number of fund investors (in various funds across various fund families) performed rapid trades in mutual funds. These investors were taking advantage of rises or falls in markets that were not immediately reflected in funds' NAV prices. While a few investors made profits this way, other investors in the funds suffered owing to the resulting increase in fund costs.

It was also unfair to those investors who held onto funds which specifically forbid rapid trading. Often, the fund companies didn't enforce the rules, looked the other way, or, in a few instances, the fund executives themselves partook in rapid-fire trading despite encouraging the public to "buy and hold".

The resulting outcry and Eliot Spitzer investigation caused many firms to tighten their rules and increase penalties for rapid traders. Now Smart Money's Arden Dale points out the rules are too difficult for ordinary investors to understand:

Fidelity Investments, in an Aug. 29 prospectus for its Fidelity Fund, said the "fund may alter its policies at any time without prior notice to shareholders." Fidelity does spell out restrictions in detail, however. It explains that excessive trading activity is measured by the number of round-trip transactions in a shareholder's account, and adds that a round-trip transaction occurs when a shareholder buys and then sells shares of a fund within 30 days. Shareholders in the fund are "limited to two round-trip transactions per fund within any rolling 90-day period, subject to an overall limit of four round-trip transactions across all Fidelity funds over a rolling 12-month period."

Sources quoted in the article seem to think that vague rules are either intended to protect fund companies' butts, or discourage active traders from getting started:

Firms want to demonstrate to regulators that they're paying attention to their responsibility to control abusive trading, "but on the other hand, they are being as vague as they can about their policies because they don't want to get into trouble about not enforcing them," said Mauthe.

Harman, of Morgan Lewis, said that for some companies, keeping the rules vague is not so much a defensive posture, but a way to discourage timers from getting started in the first place. Telling investors exactly where a fund draws the line can encourage timers to go right up to the line, he said.