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To print article, click Print on your browser's File menu. Go back Posted 12/6/2003 |
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Extra! 5 ways to protect yourself from the fund scandal Youre mistaken if you think the mutual fund scandal has nothing to do with you. Here are five things to do now with your investments. By Scott Burns When the mutual fund scandal story started, I thought of Jay Rohrlich. Dr. Rohrlich has nothing to do with mutual funds or the stock market, at least not directly. He was a psychiatrist who practiced on Wall Street in the '70s and '80s. I met him after he wrote "Work and Love: The Crucial Balance," a book about the peculiar imbalance that afflicted his Wall Street clientele. I wrote about the book when it was published and went to visit him years later, in 1990, when the book was out of print, but its message was still vital. The crux of his book was that work on Wall Street -- and more broadly in the financial services industry -- was different from other work because it was only about money. There was no product, no goal. There was nothing but the production of endless amounts of money. It tended to make a mess of people's lives. We are seeing it yet again. Late trading, the basis for the original lawsuits from New York Attorney General Eliot Spitzer, is an overtly criminal act driven entirely by the pursuit of gain. The same forces have driven mutual fund market timing. You can't help wondering why the people at Janus Capital
5 things you can do So how do we respond? How do people like you and me protect ourselves from this costly sleaze? Let me start with the practical issue many readers have raised. First, don't worry that you'll lose all your money. Your mutual fund assets are in a separate custodial account. The assets can't walk away. They won't emigrate to Brazil. Indeed, even if the mutual fund firm involved fails or disappears in a firestorm of litigation and class-action suits, your actual assets will be safe. And don't despair if still more firms are implicated. Sources indicate we're closer to the beginning than the end. Second, consider the consequences of liquidating a fund before you do it. There will be no tax consequences in a deferred account, but there can be early-redemption penalties for some funds and there can be tax consequences for funds held in taxable accounts. As a practical matter, however, odds are the tax consequences will be small: Between the new 15% tax rate on long-term capital gains and the losses from the three-year bear market, taxes aren't a big concern for most investors. Still, you ought to know the consequences. Third, having done that preparation, move your money. This is what these bozos understand. Don't think your small account is meaningless. Don't be afraid to tell your 401(k) plan administrators that you expect them to act as the fiduciaries they are. Insist that errant-fund firms be eliminated from your plan. Just as it took the dissolution of Arthur Andersen to get the attention of the accounting industry after Enron, it will take the disappearance of a Janus, a Strong or a Putnam to get Wall Street to pay attention. It's a big, hungry animal. You've got to hit it with a big stick. Fourth, when you move your money, use it as an opportunity to rethink your investments. Try to avoid a brand-new set of commissions. Try to avoid the financial malpractice that is built into much of the industry's cost structure. Commissions can be minimized or eliminated by moving your assets to a mutual fund complex you trust, or to a mutual fund supermarket where you can choose from multiple fund companies. Stay flexible. Fifth, don't be afraid to be an independent investor. It's not that difficult. More important, being independent may be the only way you can avoid an industry so afflicted with greed. Payback time Yes, I know there are good people in financial services. I have friends in the business. There are many that I admire. One of my stepbrothers was a career broker. When he died a few years ago, his eulogy was given by a client of 20 years. So I know there are good people in the business. Unfortunately, the good people don't wear badges. Still worse, they may be "good people," but they haven't lifted a finger or raised their voices. At best, they just did their thing. When was the last brokers' revolt against corrupt management? Why did no one at Janus or Bank of America say, "This is wrong? Why didn't the brokers at Morgan Stanley There is only one answer: They didn't care about their customers. They cared about their jobs and compensation more. We should behave accordingly. See Scott Burns' Web site. |
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