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[TTHQ Staff]

BEING STREET SMART ____________________ Sy Harding DOESN’T ANYONE CARE ABOUT THE LITTLE GUY? March 18, 2005. At a time when the Administration is spending a great deal of time and money traveling the country trying to sell the idea that every American worker should become an amateur money manager, by having his or her social security contributions deposited in a personal investment account, Wall Street institutions, which would apparently be depended on to administer those accounts, are continuing to display their distain for small investors. That contempt was made clear enough by the investigations over recent years after the severe 2000-2002 bear market wreaked its havoc on investors. Even the largest, most respected brokerage firms, investment banks, mutual funds, and corporations, were shown to have systematically misled, misinformed, and otherwise cheated and taken advantage of their investors for their own profits. Billions of dollars in fines were paid. New rules and regulations were passed to positively end the abuses, and investors were assured such mistreatment and exploitation could not recur. So does that mean Wall Street firms have adopted a new ‘love our customers’ attitude toward investors? You be the judge. In last year’s investigations into mutual fund abuses, it was revealed that many mutual funds had secret arrangements with hedge funds, allowing them to buy and sell shares in the mutual funds ‘after hours’ when the funds were closed to normal investors. That allowed those few very large customers to wait and see what announcements came out after the market closed each day that might affect the mutual fund’s price the following day, and then make their trades. Mutual funds were fined and told they must stop such illegal activities that harmed their ordinary investors. Response of the mutual fund industry: Since the situation was misnamed as a ‘market-timing’ scandal, the funds used that as an excuse to lock their ordinary investors in more tightly, by increasing their minimum holding periods and imposing extra fees, usually 2%, on investors who needed or wanted their money sooner. So the ‘market-timing’ investigation and scandal were used to take further advantage of small investors, and even had the support and blessing of the SEC, even though the ‘market-timing’ abuses were illegal activities undertaken by the mutual funds themselves and their few largest investors, not their ordinary investors. As a result of the separate brokerage firm scandals and investigations, brokerage firms were required to begin providing investors with stock reports from independent analysts in addition to their in-house reports which had proven to be so misleading and self-serving, and to take steps to prevent numerous other abuses from taking place again. Brokerage firm response: Get rid of small investors. The Wall Street Journal reported this week that major brokerage firms including Merrill Lynch, Morgan Stanley, and Piper Jaffray, have stopped paying commissions to their brokers on smaller accounts. The intent is obviously to discourage their stock-brokers from accepting or continuing to service small investors. Other firms are not taking a chance that their brokers might continue to deal with small investors anyway, and have shifted smaller accounts to call centers. R.Jarrett Lilien, president of ETrade, the discount Internet brokerage firm, says, “The traditional full-service firms don’t want those small investor accounts any more.” In an effort to pick up the accounts of small investors being dumped by full service brokers, or forced out by poor service, on-line discount brokerage firms have been engaged in an aggressive price war over which will take the largest share of the potential new accounts. In February, ETrade, Charles Schwab Inc., Fidelity, and Harrisdirect, cut prices significantly for smaller accounts, generally defined as those with less than $50,000, while TD Waterhouse cut commissions for its small account-holders, which it defines as those with less than $100,000. At least it’s nice to be wanted by someone, and also be able to make trades quickly and at lower cost (as long as it’s on-line by computer and there’s no need to speak to anyone). But investors used to full service and being able to speak with a broker they may have found to be a good advisor, are likely to find it difficult to fill that void effectively with hot tips from chat rooms and bulletin boards. And for all the talk about transaction costs making a big difference in long-term performance, the most important decision each time is still what to invest in and when to get out of it. This latest attitude of Wall Street, which some cynics might describe as ‘if we can’t abuse them and take advantage of them we don’t want them as customers’, should be considered by Congress as it continues the debate over privatizing Social Security. It reminds me of a story told about President A. Lincoln, who once asked an audience, “How many legs would a horse have if we call the horse’s tail a leg?” When the answer came back, “Five”, he replied, “No. The horse would still have four legs. Calling a tail a leg doesn’t make it a leg.” I suspect that forty years from now, when today’s 25-year old construction workers and truck-drivers are ready to retire, it will be discovered that having called them capable of being successful investors did not make them capable investors. President Bush says that if there are some who don’t think they can be successful investors, “we will show them how or provide assistance”. If that means expecting Wall Street to put their past (and present) attitude toward public investors aside, I suspect it will also be discovered that expecting a business with a cold and heartless history, to become warm and benevolent won’t make that so either. If you agree, it wouldn’t hurt to send your Congressman a copy of this column. If you don’t agree, you should send him or her your own opinions. It is one of the most important debates in many years, as far as having long-lasting effects. Sy Harding